April 2025 Employer National Increase

As announced in the October 2024 Budget, the rate of Employer’s National Insurance Contributions (‘NIC’) will increase from 13.8% to 15% from 6 April 2025

This 1.2% rate increase, combined with the drop in the employer NIC contribution threshold from £9,100 to £5,000 per employee will significantly increase the tax burden for many employers. In light of these changes, it is worth re-considering salary sacrifice pension arrangements, if these are not already in place.

The high-level tax position on work-based pension contributions is as follows:

Non salary sacrifice: 

• Employee pays 80% of their contribution from net pay 
• Pension scheme claims back basic rate (20%) income tax relief from HMRC 
• Higher/additional rate taxpayers need to personally claim the extra 20% / 25% tax relief from HMRC (or lose it if not). This extra relief comes back to them, not into the pension scheme 
• No NIC relief is available i.e. the employee still pays employee NIC on the income used to fund the pension contribution (8% for basic rate taxpayers, 2% for higher/additional rate taxpayers) and the employer pays 15% employer NIC.

Salary sacrifice: 

• Employee sacrifices pay equal to their own gross pension contribution, and the employer pays this into the pension scheme as an extra employer pension contribution 
• Having sacrificed this amount, no payroll taxes arise on it i.e. the employee enjoys full income tax and employee NIC relief, without any separate claims required 
• The employer saves 15% employer NIC on the sacrificed amount, some/all of which can be ‘shared’ (i.e. added to the employer contribution) if they wish 
• Pension scheme does not need to claim any tax relief from HMRC.

As can be seen above, salary sacrifice enables the employee to reduce their gross salary (and/or to give up some/all of a cash bonus) in return for an employer pension contribution. In doing so, the employee effectively enjoys full income tax relief at source (i.e. without needing to actively claim higher rate relief), and saves employee NIC. The employer also saves its 15% employer NIC on the amount sacrificed, since no employer NIC is payable on an employer pension contribution.

‘Bonus sacrifice’ (where a pension contribution is paid instead of a cash bonus) can be particularly helpful if a cash bonus will take total taxable income into a tax inefficient threshold – for example into the £60k-£80k taxable income band in which the High Income Child Benefit applies, or into the £100k-£125k band in which the Personal Allowance tapers (creating an effective tax rate for the employee of 62%).

A ‘salary sacrifice’ pension scheme can either partly or fully replace any existing auto-enrolment pension scheme although, in order to be effective for income tax and NI purposes, it is important that appropriate procedures are followed. Advice on such matters should be taken as part of putting a salary sacrifice scheme in place, and it is important that any salary sacrifice scheme is properly implemented and documented, so as to be effective for tax purposes.

Wider considerations of salary sacrifice should also not be overlooked – for example employees cannot sacrifice below the National Minimum Wage in any pay period, and forfeiting pay might have financial implications for employees. It may therefore be necessary to initially operate sacrifice and non-sacrifice schemes in parallel some cases.

As well as pensions, it is also possible to salary sacrifice for other tax efficient benefits in kind, including electric/some hybrid cars, or additional holiday. Many other salary sacrifice arrangements are caught by the ‘optional remuneration arrangements’ nullifying the tax saving.

If you would like to discuss this matter further, please contact your usual Crowe contact.