Salary Sacrifice:

As April 2025 approaches, UK businesses are preparing for significant changes to National Insurance Contributions (NICs) that will increase payroll costs. While these changes may seem challenging, there’s a silver lining: strategic use of salary sacrifice arrangements can help businesses manage their NIC burden effectively.

This guide explains how salary sacrifice works, its benefits, and how your business can leverage it to stay compliant and cost-efficient.

What Is Salary Sacrifice?

Salary sacrifice is a voluntary arrangement where employees agree to reduce their gross salary in exchange for non-cash benefits, such as:

• Pension contributions (the most common choice).
• Childcare vouchers.
• Cycle-to-work schemes.

The key advantage? These arrangements not only provide benefits for employees but also offer significant National Insurance savings for employers.

How Salary Sacrifice Reduces NICs

By reducing an employee’s gross salary:

• Employers pay NICs on a lower salary amount, reducing their contributions.
• Employees also benefit from paying less NICs and potentially less income tax.

For example, if an employee sacrifices £2,000 of their gross salary for additional pension contributions, both the employer and employee save on NICs for that portion.

This dual benefit makes salary sacrifice a powerful tool for managing payroll costs—especially in light of the upcoming NIC rate increase from 13.8% to 15% in April 2025.

Avoiding Pitfalls: National Minimum Wage Compliance

While salary sacrifice is highly effective, it must be implemented with care to ensure compliance with National Minimum Wage (NMW) regulations.

Key rule: An employee’s salary after the sacrifice cannot fall below the NMW threshold. Non-compliance could lead to penalties and reputational damage.

For businesses with employees close to the NMW, this might seem like a roadblock, but innovative solutions exist to help you balance compliance with savings.

How Intelligent Payroll Can Help

At Intelligent Payroll, we specialise in helping businesses navigate the complexities of salary sacrifice schemes. Here’s how we can support you:

• Tailored Guidance: Our payroll experts will work with you to design salary sacrifice strategies that maximise savings while ensuring compliance with NMW and other regulations.
• Seamless Integration: Our payroll software integrates effortlessly with salary sacrifice arrangements, reducing administrative burdens and ensuring accurate calculations.
• Compliance Assurance: With our expertise, you can implement salary sacrifice schemes confidently, knowing you’re meeting all legal requirements.

Why Salary Sacrifice Matters for 2025

The upcoming NIC changes mean businesses face higher payroll costs:

• NIC rates will rise from 13.8% to 15%.
• The secondary threshold for NICs will drop, increasing liabilities on lower earnings.

Salary sacrifice schemes can provide a vital cost-management solution, allowing businesses to:

• Offset rising NIC costs.
• Support employees with enhanced benefits, like boosted pension contributions.
• Optimise payroll efficiency in a compliant manner.

Maximising Your Payroll Strategy

Salary sacrifice is more than a cost-saving measure—it’s a way to enhance employee benefits, streamline payroll, and adapt proactively to regulatory changes.

Pro Tip: Combining salary sacrifice with other strategies, such as utilising the increased Employment Allowance in 2025, can further reduce your NIC liabilities.