Salary sacrifice can help UK firms mitigate NICs rise, says tax lawyer

The headline from last week’s Budget for most businesses has been the rise in employer National Insurance contributions to from 13.8% to 15%, adding an estimated £20-25 billion in costs. Additionally, the Chancellor Rachel Reeves confirmed the NIC threshold will drop from around £9,000 to £5,000, meaning an extra £4,000 of each employee’s income will be taxed at the new rate. Together, these changes could significantly raise costs for employers, particularly those with a big headcount. We’ll speak with a tax lawyer about a potential solution to help mitigate the impact.

In response to the Budget, many companies are now looking for ways to cut costs without resorting to the nuclear option of reducing headcount. Top of the list of possible solutions is salary sacrifice. So what is salary sacrifice, and why is it so valuable in this context?

Salary sacrifice is a scheme in which an employee agrees to give up part of their gross salary in exchange for certain non-cash benefits, such as pension contributions, childcare vouchers, or cycle-to-work schemes. By lowering the employee’s gross salary, salary sacrifice reduces the amount of NICs owed by both the employer and the employee. Firms use salary sacrifice because it’s a tax-efficient way to provide valuable benefits to employees, maximizing their take-home pay while also reducing the employer’s payroll costs. Importantly, pensions are one of the most tax-efficient options available, as they remain exempt from employer and employee NICs and offer full tax relief for employees.

For HR professionals, this is an opportunity to help both the business and its employees. By managing the implementation of these schemes successfully, it helps the business mitigate the impact of the NIC rise while at the same time providing employees with a valuable benefit, so it’s a win-win. As we’ll hear shortly, when it comes to salary sacrifice as a vehicle to save on NICs the benefit to choose, above all others, is pension contributions. 

So, let’s hear more about using salary sacrifice in this way. Shortly after the Budget I spoke to tax expert Chris Thomas and I asked him whether he thought the Chancellor’s decision to raise employer NICs was significant. 

Chris Thomas: “It is significant. I think they announced it was going to bring in something like £20bn or £25bn which says a lot about how significant it is and I think especially because it isn't just the rise in the rate, which you mentioned, it's also the fact they're reducing the threshold above which it kicks in. So I think currently it's about £9,000 and something, and it's going down to around £5,000 so that effectively is bringing in another five grand per employee being taxed at 15% on the on the new rate and that actually is a large part, I think, of the overall cost that's going to arise out of this for businesses and especially when you combine it with the rise of national minimum wage for those of our clients who perhaps have a number of people on the lower end of the salary spectrum. So it is going to probably increase costs quite materially.”

Joe Glavina: “Given the current setup, should employers seriously consider salary sacrifice for pensions and why is this approach so tax-efficient for managing NICs?”

Chris Thomas: “Yes, definitely. If this isn't something that you're already doing you absolutely should be looking at it and there was quite a bit of talk before the Budget along the lines of, oh, would the government change the rules on the tax relief that applies to pensions more generally, or would they put employer NICs on pension contributions? They haven't done any of that and, essentially, pensions have escaped from this pretty much kind of untouched and so it does remain a very tax efficient thing to do and the reason for that is because any amount that is paid by way of an employer pension contribution will be completely free of national insurance, both employer and employee actually, and the employee also gets full tax relief at their marginal rate on that contribution. So, it's the most tax efficient thing you can do, frankly, as kind of an employer in terms of how you're kind of providing benefits and although, as we know, a number of years ago the use of salary sacrifice was restricted somewhat, that doesn't apply to pensions, they're kind of on the white list. So, yes, if you're not doing pension contributions through salary sacrifice, you probably should be. “

Joe Glavina: “If HR is to implement the pensions idea you talked about how should they go about it?”

Chris Thomas: “So the key thing really is to make sure that it is legally effective as a variation to the employee’s contract of employment because it won't work and it's no good if, effectively, it still just amounts to an employee pension contribution which would be the analysis if you don't structure it properly. Now it’s not particularly complicated, but it just means that you need to have the right wording, whether that be a specific salary sacrifice agreement, whether it be through your flexible benefits portal, or however it is that you do it, you just need to make sure that that is expressed in the right way. So I think that's the main thing. So, it's not particularly complicated it's just a question of making sure you get some advice to properly implement it.”

Joe Glavina: “Anything else, Chris? Any other solutions?”

Chris Thomas: “It's probably just also worth briefly mentioning a couple of other ways in which employers could look at saving costs in relation to the delivery of benefits to employees. So one of those, and we mentioned it in a previous programme, is potentially looking at using a health care trust as an alternative to private medical insurance. That doesn't necessarily save you any employer NICs but it does offer, as we said in the previous programme, a means of delivering those often very valued healthcare benefits to employees but in a way that saves tax in other ways and potentially has wider savings and flexibilities which can be quite attractive. So there's that. Also, think about share incentives, tax-advantaged share incentive plans, and if you're not using those and taking advantage of those it’s definitely worth thinking about that because that is a way in which you can deliver value to employees in a tax and NICs attractive way.”

The healthcare trusts programme Chris mentioned is called ‘Healthcare trusts: a cost-effective and flexible alternative to PMI’ and is available for viewing now from the Out-Law website. 

To recap, salary sacrifice, especially for pension contributions, is a powerful tool to offset rising employer NICs but, as Chris explained, it’s essential that it is implemented properly. If you would like help with that please do contact Chris Thomas - his details are on screen for you. Or, of course, you can contact your usual Pinsent Masons adviser.

- Link to HRNews programme: ‘Healthcare trusts a ‘cost effective and flexible’ alternative to PMI, says lawyer’