Could salary sacrifice be the answer to increased staff costs for employers?

Following the Autumn Budget, much of the discussion and challenge is around how employers will cope with the double whammy of employer National Insurance Contribution (NIC) increases and above inflation rises to the statutory National Living/Minimum Wage rates in April 2025. Both of these measures will make employing staff much more expensive for most employers, and the general feeling is that many businesses will be unable to pass all of these extra costs on to their customers or to absorb within the profits of the business.

Fortunately, one area that was not covered within the Budget is salary sacrifice, and so this remains a viable solution to employers in shaping the remuneration packages for staff in a way that helps to minimise National Insurance costs for the business, and in many cases, reduces the tax and/or National Insurance deductions suffered by employees on their pay and benefits.

Salary sacrifice has been around since the 1980s and the concept remains the same, i.e. the employee agrees to give up part of their pay (which is always taxable in full and subject to employer/employee NIC) in exchange for a non-cash benefit which attracts less tax and/or NIC. The main point that is different these days, is that the Government has already legislated to prevent a tax advantage for all but a few staff benefits, and so salary sacrifice is usually only attractive for certain benefits.

Pension salary sacrifice

The most popular salary sacrifice arrangement is, and always has been, in relation to pension contributions, whereby the employee gives up part of their pay in return for an increased employer contribution to the pension plan of the same value. Employer contributions are not subject to NICs (unlike employee contributions) and therefore there is an employer and employee saving as illustrated in the following example (using April 2025 rates):

• Employee is paid £40,000 pa
• The employee contributes 5% of pay into the pension, i.e. £2,000
• Under salary sacrifice, pay is reduced to £38,000 pa and the employer pays £2,000 into the pension plan as an employer contribution.

Saving for employer = £2,000 x 15% = £300pa

Saving for employee = £2,000 x 8% = £160pa

Clearly, the savings for the employer will be more attractive the more employees there are, but such an arrangement can still be very effective for smaller businesses where pay and/or employee pension contributions are above average.

Other salary sacrifice options

Employers can theoretically offer salary sacrifice for any non-cash benefit. However, the arrangements that achieve NIC savings for the employer over and above pensions are restricted to:

• Fully electric cars
• Cycle to work
• Purchase of additional annual leave

Some of these schemes are gaining significant traction, especially following the announcement that employer NICs will be increasing from next year. This is particularly the case with electric cars, where the NIC savings for the business and tax/NIC savings for the employee can be significant.

What’s the catch?

As the old saying goes, ‘if something appears too good to be true, it probably is.’ This is not quite true for salary sacrifice as it can be very effective - and legal - when done properly. However, there are some critical aspects for employers to navigate when offering salary sacrifice arrangements to staff, some of which may affect the viability of doing this within the business. For example:

• This involves a legally binding change to the employees’ contractual pay, with various tax, legal and other implications to manage.
• It is illegal to allow an employee to sacrifice pay below statutory National Living/Minimum Wage levels and so this is an area that employers require robust procedures and checks to ensure compliance (which is a frequent error even by some of the largest employers).
• There are tax rules to adhere to in order to benefit from tax and NIC efficiencies, especially in relation to the arrangements involving cars or bikes.

Armstrong Watson’s team of tax, payroll, pensions and benefits specialists can support clients at all stages of implementing and operating salary sacrifice schemes, ensuring these are sufficiently robust to satisfy the key tax and legal requirements and to avoid a future HMRC challenge.