Following the October 31st, 2024 Budget announcement, significant changes to National Insurance Contributions (NICs) are set to take effect from April 2025. These include an increase in the Employer NI rate and a reduction in the threshold for NI payments. For both employees and employers, these updates will lead to increased NIC expenses, prompting many to consider strategies like salary sacrifice to mitigate the impact.
In this blog, we’ll explore the benefits of salary sacrifice compared to auto-enrolment in light of the upcoming changes. By understanding these options, you can make informed decisions about maximizing savings while ensuring compliance with minimum wage regulations.
1. Key Changes in National Insurance from April 2025
As outlined in the October 2024 Budget, the following adjustments to NICs will come into effect starting April 2025:
Employer NI Rate Increase: The Employer National Insurance rate will rise by 1%, moving from 13.8% to 14.8%.
Lowered Employer NI Threshold: The earnings threshold at which employers start paying NICs will decrease, increasing the NIC liability for businesses on employee earnings.
For employers, this combination of a higher rate and a lower threshold will mean higher NI expenses, especially for those with larger workforces. Implementing tax-efficient strategies, such as salary sacrifice, could help reduce National Insurance costs for both businesses and employees.
2. Understanding Salary Sacrifice vs. Auto-Enrolment: Key Differences
Auto-Enrolment:
Under auto-enrolment, employees are automatically enrolled in a pension scheme, with contributions based on a percentage of their gross salary.
NI is calculated on the full salary before contributions, meaning auto-enrolment does not reduce the NICs owed by either the employee or employer.
Impact: With the April 2025 changes, relying solely on auto-enrolment will result in increased NI costs for employers due to the higher rate and reduced threshold.
Salary Sacrifice:
Salary sacrifice allows employees to reduce their gross salary in exchange for pension contributions, which decreases the salary on which NICs are calculated.
Impact: By reducing the gross salary, both the employee and employer can lower their NI contributions, potentially offsetting the impact of the higher NIC rate.
3. National Minimum Wage Impact on Salary Sacrifice
Although salary sacrifice can provide significant NI savings, employers must ensure that employees' post-sacrifice salaries remain above the National Minimum Wage (NMW) or National Living Wage (NLW), depending on their age. This requirement limits the amount lower-paid employees can sacrifice, which may make auto-enrolment a more practical option for them.
4. Examples: Potential Savings with the New NI Rate and Threshold Changes
Here are two examples to show how salary sacrifice could help save on NICs for both employees and employers under the new April 2025 changes.
Example | Auto-Enrolment | Salary Sacrifice | Savings with Salary Sacrifice |
Example 1: Higher-Paid Employee | |||
Employee Salary | £50,000 | £50,000 reduced to £47,500 | |
Employee Pension Contribution | £2,500 (5% of £50,000), deducted from net salary; no NI impact | £2,500, with £47,500 as the adjusted gross salary base | |
Employer Pension Contribution | £1,500 (3% of £50,000) | £1,500 | |
Employee NI Contribution | 12% of £50,000 (no reduction in NI due to pension contribution) | 12% of £47,500 (lower NI base) | ~£300 saved annually on NI for the employee |
Employer NI Contribution | 14.8% of £50,000 = £7,400 | 14.8% of £47,500 = £7,030 | ~£370 saved annually on NI for the employer |
Summary | No NI savings for employee or employer under auto-enrolment. | Both employee and employer save on NI, as NI contributions are based on reduced gross salary. | Total NI savings: ~£670 |
Example 2: Lower-Paid Employee | |||
Employee Salary | £23,000 | £23,000 reduced based on contribution; sacrifice limited by NMW/NLW | |
Employee Pension Contribution | £1,150 (5% of £23,000), deducted from net salary; no NI impact | Limited contribution due to NMW, keeping earnings above NMW/NLW threshold | Limited NI savings due to restricted sacrifice |
Employer Pension Contribution | £690 (3% of £23,000) | £690 | |
Employee NI Contribution | 12% of £23,000 (no reduction in NI due to pension contribution) | 12% applied to reduced salary based on limited sacrifice | Minimal NI savings for employee |
Employer NI Contribution | 14.8% of £23,000 = £3,404 | 14.8% on slightly reduced salary due to limited sacrifice | Minor NI savings due to limited sacrifice |
Summary | No NI savings for employee or employer. | Limited salary sacrifice potential due to minimum wage rule; marginal reduction in NI costs. | Minimal or negligible savings for both employee and employer |
In Example 1 (higher-paid employee), salary sacrifice offers clear advantages by reducing the NI base, leading to combined annual NI savings of approximately £670 for both the employee and employer.
In Example 2 (lower-paid employee), auto-enrolment may be more practical due to minimum wage constraints, which restrict the employee’s ability to participate in salary sacrifice. Consequently, NI savings in this scenario are minimal or negligible, making auto-enrolment a more straightforward choice.
5. Pros and Cons of Each Scheme with the New NI Changes
Aspect | Salary Sacrifice | Auto-Enrolment |
NI Savings | Employee and employer NIC savings | No NIC savings |
Impact of NI Rate Increase | Mitigates effect of higher Employer NI | Full NIC burden, including rate increase |
Flexibility | Requires contractual change, fixed sacrifice | Automatic enrolment, easy to manage |
Minimum Wage Impact | Restricted by minimum wage rules | No impact on employee’s base salary |
6. Should Employers Adopt Salary Sacrifice to Offset Higher NI Costs?
With the April 2025 NI rate increase and lower threshold, salary sacrifice is likely to be a beneficial strategy for employers to reduce NICs:
For Higher-Paid Employees: Salary sacrifice offers significant savings potential by reducing the taxable salary, allowing both employees and employers to save on NICs.
For Lower-Paid Employees: Due to minimum wage limitations, auto-enrolment may remain the more practical solution to avoid dropping below NMW/NLW thresholds.
7. Key Takeaways
The April 2025 Employer NI rate increase and lowered NI threshold will increase NIC costs for employers and affect employees, making cost-efficient strategies more valuable.
Salary Sacrifice offers valuable NIC savings but must be managed carefully to stay above minimum wage thresholds.
Auto-Enrolment is still important for lower-wage employees, as it ensures compliance with minimum wage laws while maintaining pension contributions.
Do you need these calculations for your staff? Gives us a ring on 0333 050 5658 or email us at silvia@visionaccountants.co.uk to see how these savings apply to you.
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