Act now to offset rising employer National Insurance costs
The changes announced by the Chancellor in the Autumn Budget take effect from 6 April 2025, with the National Insurance increasing from the current rate of 13.8% to 15%.
The secondary threshold, which is the rate in which employers start to make National Insurance Contributions, will also be reduced from £9,100 to £5,000. This means employers must pay 15% National Insurance on employees’ salaries above £5,000 from 6 April 2025.
There was support announced to small employers with an increase in the employment allowance to £10,500 from 6 April 2025, and expanded by removing the £100,000 employer national insurance bill limit (which currently prevents employers with a higher total National Insurance bill from qualifying for the allowance), allowing more employers to benefit. The employment allowance is a government initiative that allows eligible employers to reduce their National Insurance liability.
Based on the October 2024 data published by the Office for National Statistics, the average UK weekly wage (including bonuses) across all industry sectors (in England and Wales) is £693 gross. That’s equivalent to an annual salary of approximately £36,000.
The increase in an employer’s National Insurance costs from 6 April 2025 for an employee earning a salary of £36,000 will be £938 a year, as shown below:
How to offset increased employer National Insurance costs
One of the ways in which employers can reduce the National Insurance it pays, is by introducing pension salary exchange (also known as salary sacrifice).
There is also a benefit to employees of participating in pension salary exchange, as they also make a National Insurance saving on the amount they choose to contribute into the workplace pension plan.
Pension salary exchange
Pension salary exchange is not another pension scheme. It is simply a more efficient way for contributions to be paid into a workplace pension plan.
Under a pension salary exchange arrangement, employees agree to reduce their salary and, in return, their employer enhances their pension contribution by an equivalent amount. Paying the pension contributions in this way reduces the amount of National Insurance the employer and employee pays.
What are the benefits of pension salary exchange?
- From 6 April 2025, the company will make a national insurance saving of 15% on the amount employees choose to pay into the pension scheme via pension salary exchange.
- The company can choose to retain the employer national insurance savings or pass back some, or all, of these savings as an additional pension contribution.
- Employees save national insurance at their marginal rate (8% or 2%) on the amount they choose to pay as an employee contribution, which increases their take-home pay when compared to the net pay or relief at source methods of tax relief.
- If the company pension plan currently operates the relief at source method of tax relief, higher and additional-rate taxpayers receive tax relief at their highest marginal rate immediately if they participate in pension salary exchange and do not need to reclaim their additional tax relief back via their self-assessment each year.
- It enhances the employee benefits package provided to employees.
What are the potential employer National Insurance savings from pension salary exchange?
If we look at a worked example, based on an employer with 100 employees where the average salary is £36,000 a year, the current and future national insurance costs are as follows:
If this employer introduced pension salary exchange and the average pension salary exchange contribution is 5%, the employer’s National Insurance savings would be as follows:
This example demonstrates that, if all employees participated in pension salary exchange, the employer saves £27,000 a year in National Insurance. However, pension salary exchange is voluntary and employees can choose to opt out of pension salary exchange and remain enrolled in the workplace pension scheme. Similarly, employers can be selective over which employees they offer salary exchange to. This may help to mitigate National Minimum Wage issues for lower paid employees.
In addition to pension salary exchange, if employees receive a bonus, the employer can introduce bonus sacrifice. This is where an employee can choose to sacrifice some or all of their bonus and have it paid into the workplace pension instead. This approach means that employees do not pay income tax or national insurance on the amount of bonus they choose to sacrifice, and the employer also saves national insurance on the amount of bonus that is sacrificed into the workplace pension. Care should be taken on the timings and documentation when implementing bonus waivers, so we recommend you talk to the experts.
How we can help you
Moore Kingston Smith Financial Advisers can help employers implement a compliant pension salary exchange arrangement to help mitigate the increased rate of employers National Insurance. Get in touch if you would like to start benefiting from the available employer national insurance savings. We are also partnered with Husky, if you are looking for an automated process, they are pension specialists that make the Salary Exchange process easy.
