Could salary sacrifice cut your business’s National Insurance bill?

Chancellor Rachel Reeves delivered the Budget at the end of October, putting an end to speculation. Yet, as a business owner, you might still be wondering how the announcements could affect you and what your options are.

The good news is that while outgoings may rise, salary sacrifice might provide a solution.

2 Budget measures could affect your business’s finances

Two key Budget measures could affect the finances of businesses.

First, Reeves confirmed the national minimum wage will rise by 6.7% on 6 April 2025. That means the national minimum wage will increase to ￡12.21 an hour for employees aged over 21. For an employee working 40 hours a week, that’s an annual salary of almost ￡25,400.

There will also be increases to the national minimum wage for employees under 21 and apprentices.

Second, and potentially affecting your business’s finances even more, were the unveiled changes to employer National Insurance contributions (NICs).

From 6 April 2025, employer NI rates will rise by 1.2% from 13.8% to 15%. In addition, the threshold for paying NICs will fall from ￡9,100 a year to ￡5,000.

So, not only will you pay NI at a higher rate, but on a larger proportion of employees’ salaries.

Salary sacrifice could reduce your National Insurance bill

If you’re looking for ways to cut your outgoings after the Budget announcements, salary sacrifice may be an option you want to consider.

Essentially, it’s an agreement between you and an employee that would reduce their salary in return for higher pension contributions. Crucially, the contributions you make to an employee’s pension are not liable for tax or NI. So, it could be a useful way to reduce your overall tax bill.

Let’s say you have an employee who earns ￡25,000. If this employee reduced their annual salary by ￡938, you’d save ￡140.70 in NICs. That might seem like a small amount, but if it applied to your whole team, it could add up.

Salary sacrifice could benefit your employees too

Salary sacrifice doesn’t only benefit your business, but it could support your employees’ financial wellbeing too.

Employees don’t pay Income Tax or NI on pension contributions either. So, sacrificing some of their salary to boost retirement savings could reduce their tax bill. In some cases, employees may even be better off financially in the short term once a reduced tax bill is taken into consideration.

We can work with you and your employees to provide tailored examples demonstrating how salary sacrifice could affect tax liability.

We’re here to answer your questions about salary sacrifice

If you have questions about how salary sacrifice could be implemented at your business or want support setting up a salary sacrifice scheme, we’re here to help.

We can also be on hand to work with you to communicate the changes to your employees, so they understand the potential benefits for them and can make an informed decision about whether they want to opt in to a salary sacrifice scheme.

Please get in touch to talk to one of our team.

From Nadeen, Paul and the team at Spectrum