As we draw closer to the end of the fiscal year, many employers shall be reflecting on the UK Government announcement that the rate of employer NICs is set to rise by 1.2% to 15% from 6 April 2025.
Employers should consider implementing a salary sacrifice arrangement as a way to offset the increased burden on employer NICs, if employers have not yet already put in place a salary sacrifice arrangement. It would also be a good opportunity to dust-down and check existing salary sacrifice arrangements remain suitable.
What is salary sacrifice?
A salary sacrifice pension arrangement is where an employer and employee agree to reduce an employee’s gross salary or bonus under their contract of employment in exchange for an employer pension contribution of an equivalent amount of this reduction into their pension scheme.
Salary sacrifice arrangements require a formal variation to the employment contract, as the employees are giving up their contractual right to receive a portion of their future salary or bonus in return for a pension contribution. This needs to be clearly and validly documented in accordance with HMRC’s requirements for implementing a valid salary sacrifice arrangement.
What are the advantages for employees?
Salary sacrifice arrangements can result in income tax and National Insurance Contribution (“NIC”) savings for employees as the sacrificed amount is not subject to income tax and the employee’s NICs are based on their reduced gross salary.
Salary sacrifice arrangements may not be suitable for employees in all circumstances. However, the income tax and NIC savings can make salary sacrifice arrangements an attractive option for employees.
What are the advantages for employers?
Employers can also save on NICs as the pension payment is disregarded in the calculation of earnings for the purposes of earnings-related contributions (schedule 3 of The Social Security (Contributions) Regulations 2001 and section 308 of the Income Tax (Earnings and Pensions) Act 2003).
By setting up a well-structured salary sacrifice arrangement, both employers and employees can take advantage of the NIC and tax savings whilst contributing to the employer’s pension scheme.
Autumn Budget 2024
On 30 October 2024, the UK Government announced that the rate of employer NICs is set to rise by 1.2% to 15% from 6 April 2025. The level at which employers start paying NICs for each employee will reduce from £9,100 to £5,000.
As discussed above, now would be a good opportunity to offset the increased burden on employer NICs by putting in place a salary sacrifice arrangement or dust-down and review existing salary sacrifice arrangements.
How can Wedlake Bell support employers?
We have helped many employers manage their NIC liabilities by setting up salary sacrifice pension arrangements and checking that the arrangements in place meet HMRC’s requirements, including by preparing or reviewing:
- all necessary documents to effect the salary sacrifice arrangement;
- contractual variations to employment contracts to ensure compliance with HMRC’s requirements; and
- suitable communications to employees and FAQs.
Please do not hesitate to contact our team.