WHAT IS CHANGING IN APRIL 2025?
There is little doubt that for employers the first budget introduced by the Labour government was harsh, placing significant increases in the costs of employing staff with nothing in return.
Labour were keen to appear to stick to their original pledge “not to increase taxes on the working people” and so sought to raise money via employers rather than employees.
Employer’s rates of National Insurance were increased in two ways:
- The headline rate of 13.8% that has been long-established has been increased to 15% with effect from 6th April 2025.
- The starting point at which these rates bite has also become more punitive under the budget, as where employers did not pay NI until their staff earnings reached £9,100 under the original regime, that threshold will fall to £5,000 in April 2025.
This is a double-whammy for employers already struggling with increasing costs and a generally sluggish economy in the United Kingdom.
HOW MUCH MIGHT THIS COST EMPLOYERS?
Rough estimates I have heard from existing company clients suggest that the average cost per member of staff under the new regimes increases by £1,100 per annum. It doesn’t take a genius to work out that if an employer has 20 staff on its payroll, that equates to a tax increase each year of £22,000. If the employer employs 100 staff, that increase represents £110,000 each year, and so on. All of this with no benefit in return whatsoever. It is an unashamed attack on employers across the country, and it is no great surprise to hear companies are announcing that this will hit prices and recruitment.
We have corporate clients of all shapes and sizes. One such client who employs over 400 staff is staring down the barrel of an effective increase in costs exceeding £500,000 every year.
IS THERE A SOLUTION?
Very often tax increases have to be accepted as being outside of the control of those upon whom they are levied, however there is a long-standing and widely under-utilised means by which employers can claw back some of their NI payments, and in doing so benefit staff as well.
This process has been in existence for many years, and whilst there are many canny employers who already use this, it has never gained the traction that it deserves. I believe that the changes to National Insurance in the budget may change that, and that employers seeking to limit the effects of the increases will be showing a much greater degree of interest in this in the coming months.
The process that I am referring to is ‘Salary Sacrifice’, or what is often known more palatably as ‘Salary Exchange’. You may have come across this in various contexts, but it is a widely available opportunity for employers to help themselves and their staff at the same time.
At first glance the results achieved seem unfeasible to employers and employees alike: “reduce your headline gross salary, and in doing so increase your net pay”.
MOVING TO SALARY SACRIFICE / EXCHANGE
In effect, the mechanics of this result from a change of responsibility relating to who pays the pension contributions. Automatic enrolment rules say that as a minimum of earnings an employer must pay 3% and employees much contribute 5% (gross) to their pension each month. The combined 8% is collected by the employer through the payroll, and paid to the pension provider by the employer, and the aggregated contributions are allocated as employee and employer contributions to the respective members’ plans.
Salary sacrifice/exchange is where the employer and employees agree to pass the burden of the 5% employee’s contribution to the employer, and take a reduction in gross salary of that 5% in return.
The pension contribution of 8% is then paid by the employer to the pension so the contribution is exactly the same amount. The employee is no worse off at face value because they were paying 5% into the pension, leaving them with 95% pay, and now the employer is paying the 5% into the pension they still have 95%.
Sounds obvious, but it is actually better than that for both parties. The employees typically benefit from an increase in their net pay as they are only paying National Insurance on 95% of their earnings, therefore saving the National Insurance that they would normally have paid on the 5% that they then went on to contribute into the pension. Less gross equates to more net!
WHY DOES THIS WORK FOR AN EMPLOYER?
From the employer’s perspective, they too are paying their staff 5% less, and will save the 13.8% – soon to be 15% – employer’s National Insurance on that 5%. This can represent a substantial saving to the employer and very often employers are willing to share some of that benefit with their staff as well – in the form of an increase in the overall pension contribution.
Salary sacrifice is not ideal for everyone so it is important to find out more, but it legitimately provides employers with a means of saving significant sums of money that can be used within the business, whilst simultaneously improving the net monthly pay of staff and increasing their pension contributions each month.
So, this is one of those rare occasions when it might look too good to be true, but is true nonetheless.
If you are an employer that would like to find out more, of if you are an employee of a firm that you believe might be interested in learning more, please contact Mike Brown to learn more.
