One tax rise that Rachel Reeves did warn us of in advance of the budget was an increase in the employer Class 1 national insurance contributions rate. What was not expected was the significant lowering in the threshold at which this becomes payable.
In summary, from April 2025 employers must pay national insurance at a rate of 15% (currently 13.8%) on employee earnings in excess of £5,000 (currently, £9,100). This is a huge increase in the cost of employing staff. Yes, there has been an increase in the employment allowance threshold to £10,500 which gives some respite for small employers, but for most, this is a cost that must be absorbed unless it can be passed on to customers through an increase in prices.
The question you might be asking – is there anything that can be done to mitigate some of this cost?
Yes, there is.
All employers must have a pension scheme in place and make contributions to it for eligible employees. If the employer were to meet the cost of the employees’ obligation but reduce the salary in compensation, both employer and employee national insurance costs would be lower but with no reduction on the level of contributions paid. This is known as ‘salary sacrifice’ or ‘salary exchange’.
Below, is an example of the effect of this based on an employee with a salary of £30,000 with contributions of 3% from the employer and 5% from the employee. We have used the expected national insurance rates and tax thresholds due to come into effect from April 2025.
| Employee | Before Salary Exchange | After Salary Exchange |
| Gross Salary | £30,000.00 | £28,500.00 |
| Gross Annual Contribution | £1,500.00 | £0.00 |
| Income Tax | £3,186.00 | £3,186.00 |
| NI Contribution | £1,394.40 | £1,274.40 |
| Net Pay | £23,919.60 | £24,039.60 |
| Employer | ||
| Gross Salary | £30,000.00 | £28,500.00 |
| NI Contribution | £3,750.00 | £3,525.00 |
| Pension Contribution | £900.00 | £2,400.00 |
| Cost to Employer | £34,650.00 | £34,425.00 |
| Pension Contribution | ||
| Employee Pension Contribution | £1,500.00 | £0.00 |
| Employer Pension Contribution | £900.00 | £2,400.00 |
| Total Pension Contribution | £2,400.00 | £2,400.00 |
Assumptions:
- Net pay arrangement
- Standard personal tax code – currently 1257L
In this example, the employer saves £225 in national insurance costs and the employee enjoys a £120 per year increase in take-home pay.
Alternatively, these national insurance savings can be used to help boost employees’ pension contributions or take-home pay.
Salary Exchange is a well understood concept that is used in a variety of ways. However, it is in relation to pensions that it really shows its worth.
To work correctly, it is a change in the employee’s terms and conditions of employment and should be considered permanent.
A representative of MWM Employee Benefits would be delighted to discuss this further with you; how it can be implemented and communicated to staff.
Please contact us:
| Email advice@mwmeb.co.uk Web MWM EB | London Office Lynton House, 7-12 Tavistock Square London, WC1H 9LT T: 020 7465 1980 | Solent Office 3000A Parkway, Whiteley Hampshire, PO15 7FX T: 01489 582 011 |
The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by MWM Employee Benefits or Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
MWM Employee Benefits is an appointed representative of Menzies Wealth Management who is regulated and authorised by the Financial Conduct Authority (FRN 486548).
Menzies Wealth Management Limited is registered in England and Wales under number 06597008. Our registered office is at 1st Floor, Midas House, Goldsworth Road, Woking, Surrey GU21 6LQ.
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