With NI contributions increasing for employers and businesses having to watch the purse strings, we’ve noticed an increased interest from our clients around tax-efficient benefits, in particular salary sacrifice pensions.

As an expert in the field, George Pope, Partner at GTP Accounting and Business Services has written us a useful overview for employers.  If you are a small business considering moving to a salary sacrifice pension scheme, read on!

Salary Sacrifice Pensions: How Small Businesses Can Save on NI Contributions in 2025

Guest blog: George Pope

When running a salary sacrifice pension scheme, employees agree to give up a right to a portion of their salary in return for an employer pension contribution which goes directly to the pension scheme provider. If implemented correctly, a salary sacrifice pension contributions will result in a NIC saving for both the employee and the employer.

In very simple terms if an employee earning £40,000 was to sacrifice 5% of their salary their new earnings are £38,000. The employer would save £300 in employers NICs (from April 2025) and the employee would save £160 employees NICs.

Benefits

Employees NIC - Employee pension contributions are already a tax efficient tool as employees can get tax relief at their marginal rate. Salary sacrifice schemes also allow employees to save on employees NIC.

Employers NIC – Salary sacrifice pension replaces an employee’s earnings (which would be subject to employers’ NIC) with a NIC-free benefit; saving employers 15% (from April 2025) of the amount sacrificed.

Retention tool – A helpful way to incentivise and retain talent is for the employer to share some of the employers NIC saving with employees by also increasing the employer contribution level.

Flexibility for employees – It is possible for employees to waive a bonus in lieu of an employer pension contribution. This potentially reduces the ultimate marginal rate of tax paid on that income. As taxable income is reduced for an employee under salary sacrifice it may enable employees to remain below income tax thresholds.

Points to consider

National Minimum Wage – salary sacrifice reduces pay for National Minimum Wage purposes and employers may need to exclude lower paid employees and ensure sufficient checks are in place to ensure pay is not reduced below National Minimum Wage inadvertently through salary sacrifice.

Effective implementation – Salary sacrifice arrangements must be properly implemented and employees must have given up a right to earnings before they become entitled to them. Their employee contract will need to be updated for any change.

Employee income levels – As salary sacrifice reduces an employee’s earnings this can impact ability to borrow money for example, a mortgage application. This will need to be clearly communication to employees.

Salary based benefits – some benefits are based on income levels which may be affected as a result of reducing pay by salary sacrifice.

Related considerations

Electric Vehicles and Bicycles – It is also possible and tax-efficient to provide electric vehicles and/or a Bicycle under the cycle to work scheme to employees under salary sacrifice. Whilst potentially smaller savings there is other advantages such as ESG benefits.

Value for money – As NIC increase will also apply to Class 1A NIC paid on benefits in kind (for personally used things provided to employees but paid for by their Employer), consider the full remuneration package and whether current benefits are getting the company value for money or whether cost savings can be achieved.

The more employees in the scheme, the more the cost saving to the employer will be evident.

GTP Accounting & Business Services is an Accounting Firm providing high quality bespoke Services to clients with a personal touch.  If you want support or further advice about pension administration or accounting services please email Juliet@gtpabs.co.uk to arrange an initial call.

You can also visit GTP’s website at www.gtpabs.co.uk or LinkedIn page: https://www.linkedin.com/company/gtp-accounting-business-services/ for more information.

We would add:

From an HR perspective clear and transparent communications are key in successfully rolling out a new salary sacrifice scheme.  Employee contracts must be reviewed and steps taken to ensure there is not an unnecessary breach of contractual terms.  Contact hello@thelittlehrdepartment.com if you need any guidance.