Rising workforce costs: How to save on employer National Insurance

From April, UK firms will pay £25 billion more per year due to the higher National Insurance Contribution. Here is a strategy to help offset those costs – without cutting wages.

Contact MMB’s experts today to learn how salary sacrifice could help your business save.

UK businesses will pay £25 billion more per year from April 2025, following the increased employer National Insurance Contributions (NIC) announced in the Autumn Budget. The threshold at which NIC begins to apply will be cut almost in half, from £9,100 to £5,000 per year alongside employers NIC rate increasing from 13.8% to 15%.

As employers consider how to manage these higher costs, they are looking at their biggest single spend – salaries. However, in a tight talent market where many employees are concerned by the cost of living, lower wages may simply not be feasible. 

One factor that remains unchanged is salary sacrifice. This may be the key to keeping workforce costs affordable, not just for pensions but for a whole host of benefits. However, it’s important to bust some myths around the nature of salary sacrifice, as well as ensure that the change in strategy is implemented with care to avoid unintended consequences.

What is Salary exchange/ Salary sacrifice?    

Salary exchange, also known as salary sacrifice, allows employees to exchange a part of their salary for other benefits such as pension contributions. 

Mercer Marsh Benefits (MMB) prefer to describe this as a salary exchange because the portion of salary is not lost – rather, it is exchanged for another kind of benefit. The term salary sacrifice will be used for this blog. The total value of reward remains unchanged, but because the employee’s base salary is lower, their NIC liabilities are less. 

The potential NIC savings, both for employers and employees, can be substantial. For companies contributing the minimum 3% pension contribution and hence employee contributions of 5%, salary sacrifice could save around 0.75% of total payroll costs. Employers with higher employee contribution rates could see even larger savings.

Despite these benefits, it is MMBs view that salary sacrifice is underused due to historic lack of awareness.

“When auto-enrolment was first introduced in 2012, the employer pension contribution was just 1%. The associated NIC cost was insignificant, so many employers didn’t think about it,” says Steve Johnson, Growth Leader at Mercer Marsh Benefits. 

“Pension contributions have gone up, but many employers haven’t thought to revisit salary sacrifice.”

Not just pensions: Other kinds of salary sacrifice

Aside from pensions, some of the largest salary sacrifice savings come from benefits including cycle-to-work schemes, holiday buy, electric vehicle plans, and childcare support. Smaller but still significant savings come from offering grocery stipends, insured benefits, will writing and other financial guidance, gym memberships, and technology allowances.

As well as saving NIC, these benefits can boost employee morale and attract talent. Claire Sharman, Workplace Education Consultant at Mercer Marsh Benefits, uses the example of grocery stipends: “The average household grocery bill is over £4,000 per year. Given the cost of living, this can really help employees.”

Savings from salary sacrifice rely on employee uptake of the scheme, so it’s important to choose benefits that suit your workforce. The precise mix of benefits depends on your business’s circumstances, budget, and tax advice. 

For employees to appreciate their benefits, they must know about them. 

Connor Jones, Workplace Education Consultant at Mercer Marsh Benefits, explains: “Sometimes staff recognise their benefits at face value, but don’t realise the added bits and pieces, the auxiliary benefits they receive outside of what’s obvious. Communication is really important to make sure your people engage with what you’ve provided.”

It is also important to ensure your workforce understands the nature of the agreement when they consider salary sacrifice. One of the common misconceptions that exists around participating in Salary Sacrifice pension schemes is that the reduction in your Gross Pay means that you are somehow 'worse off'. The reality of course is that it enables you to make pension contributions in a more NIC efficient way, as these deductions are now deducted from your gross pay, they are not subject to either tax or NIC. It is important for employees to assess their specific situation and consult with a financial adviser if required.

Implementing salary sacrifice

Implementing salary sacrifice is straightforward for most payroll systems, but there are a few common pitfalls to bear in mind. 

For example, if an employee sacrifices too much of their salary, they may fall below the national minimum wage. To mitigate this, we recommend a safety net to ensure that salary sacrifices only apply to staff who earn at least 10% more than the national minimum wage. 

Once salary sacrifice has been introduced, a smart payroll system can help your set-up stay compliant. 

“We’re seeing a movement towards benefit platforms that make administration easier, more accurate, secure and cost-effective,” says Sharman. 

“Those platforms also help with communicating benefits to staff, as well as looking after your benefits data, which can be used for other business strategies.”

MMB has been implementing salary sacrifices for our own employees and for our clients for more than 30 years. That expert advice can be invaluable to avoid common pitfalls while pursuing cost savings. 

“We understand, especially in current times, the pressure to manage budgets – and we know there’s a fine balance between your business’s financial reality and the benefits you can offer,” adds Sharman. 

“A mixture of creativity in benefits design, focusing on the benefits that matter, and leaning into salary sacrifice can help you on that journey.”

Contact MMB’s experts today to learn how salary sacrifice could help your business save.