Starting in April 2025, the employer NIC rate will rise from 13.8% to 15%, and the threshold for contributions will drop from £9,100 to £5,000¹.

This change is expected to put financial pressure on businesses, prompting many to explore salary sacrifice schemes as a viable solution to mitigate costs for both employers and employees.

As a result, many employers are expected to enhance their salary sacrifice offerings. This strategy not only helps employees manage the impact of higher taxes but also allows businesses to maintain competitive compensation packages without incurring excessive costs.

What is Salary Sacrifice?

Salary sacrifice is an arrangement where an employee agrees to give up a portion of their gross salary in exchange for non-cash benefits. This can include perks such as:

• Pension contributions: Employees can increase their pension savings without affecting their take-home pay.

• Childcare vouchers: These can help parents save on childcare costs.

• Electric vehicles: Employers may particularly focus on benefits that align with current trends, such as electric vehicles, which are incentivized through lower Benefit-in-Kind (BiK) tax rates. The government has committed to supporting the transition to electric vehicles, making these schemes even more attractive².

The key advantage of salary sacrifice is that it reduces the employee's taxable income, which can lead to lower income tax and NICs. For employers, this can mean reduced NIC liabilities, making it a win-win situation.

How Salary Sacrifice Works

1. Agreement: The employee and employer agree on the amount of salary to be sacrificed.

2. Benefit Provision: The employer provides the agreed-upon benefits, which are often more tax-efficient than cash salary.

3. Tax Savings: The employee pays less in income tax and NICs, while the employer benefits from lower NICs on the reduced salary.

For example, if an employee earning £30,000 sacrifices £5,000 for a benefit, they will only pay tax and NICs on £25,000. This can lead to significant savings over time.

Potential downsides of Salary Sacrifice

Whilst the benefits of salary sacrifice are compelling, there are some potential downsides which should be considered before entering into an arrangement:

Reduced State Benefits: Your entitlement to certain state benefits, such as statutory maternity pay, statutory sick pay, and state pensions, may be reduced because these benefits are calculated based on your gross salary after the salary sacrifice.

Impact on Borrowing: Since your salary is effectively reduced, it can affect your ability to borrow money. Lenders often calculate mortgages and loans based on your gross salary, so a lower salary might reduce the amount you can borrow.

Work-Related Payments: Payments like redundancy pay and statutory maternity pay, which are based on your average earnings, could be lower.

Benefit in Kind (BIK) Tax: If you use salary sacrifice for benefits like car leasing, you might face BIK tax, especially if the car is not an ultra-low emission vehicle.

Conclusion

As the UK navigates the challenges posed by increased NICs, salary sacrifice schemes are likely to become a more prominent feature of employee compensation strategies. By offering these schemes, employers can help alleviate financial pressures on their workforce while also benefiting from reduced NIC liabilities. This approach not only fosters a supportive work environment but also aligns with broader goals of sustainability and employee well-being.

However, it is important to weigh up the potential downsides against the benefits in your personal financial situation before opting into a salary sacrifice arrangement.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

The Financial Conduct Authority does not regulate advice on taxation.

Sources:

1 1st November 2024 | National insurance explainer (Budget October 2024 update) | Charted Institute of Taxation
2 30th October 2024 | Autumn Statement 2024: How is EV Salary Sacrifice Affected? | The Electric Car Scheme

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