How salary sacrifice could offset employers’ rising National Insurance costs

It has become common practice for employees to sacrifice part of their salary and/or bonus in return for their employer paying the amount sacrificed as an employer pension contribution on their behalf. 

This can be far more attractive than the employee making a direct pension contribution on their own behalf, particularly if the employer is prepared to increase their pension contribution by part or all of their national insurance (NI) contribution saving, something which many employers may want to look into following the increases to NICs announced in the budget which will apply from April 2025. 

Attractions of salary sacrifice 

Contributions paid out of an employee's after tax pay are less attractive as the employee (and their employer) will have paid NI contributions on the gross income received. If instead the employee is able to agree with their employer to sacrifice salary/bonus equivalent to the desired pension contribution, their pension contributions will increase and the employer could offset some of the cost of the NIC increases. 

Additionally, salary sacrifice may also reduce or eliminate the high income child benefit charge for those earning over £60,000. 

For taxpayers with income between £100,000 and £125,140, salary sacrifice planning can also be used to reclaim the personal allowance in addition to the income tax and NI savings. 

Conditions for a successful salary sacrifice 

It is important to note that the salary sacrifice will be effective for all purposes and to be effective it must comply with the criteria set out in the Employment Income Manual issued by HMRC. For a salary sacrifice to be effective it must be made before the remuneration being given up is treated as received for employment income tax purposes. 

For an employee this will normally be the earlier of: 

• the date the payment is made, and
• the time the individual becomes entitled to the payment. 

Where a company director is concerned the following additional dates also need to be considered: 

• the date when remuneration is credited in the company's accounts or records; 
• where the remuneration is determined during the course of a company's accounting year (or other period in respect of which the remuneration is paid) it is deemed to be paid at the end of that year or period;
• where the amount of remuneration is determined after the end of the period to which they relate, the date the amount is determined.

If there is any doubt as to the date that a director's remuneration becomes assessable to tax as employment income, the exact timing should be confirmed by the company or the director's accountant. 

Other considerations 

Where any employee is assessing a salary sacrifice it is important to consider the impact the salary sacrifice may have on other benefits. For example, if the individual is a member of an occupational pension scheme or a group life scheme, the reduced salary may result in a reduction of their benefits, unless the employer is prepared to continue to base those benefits on their pre-sacrifice salary. 

Similarly, a reduced salary could potentially reduce the loan available to an individual seeking a mortgage. For lower paid employees the floor set by the national minimum wage should also be assessed. However, the lower paid could also benefit from a reduced salary through higher tax credits.

How we can help 

At The Private Office our advice team have experience supporting business owners as well as individuals. They have knowledge across all areas of financial planning so can discuss how salary sacrifice may fit into a person's overall financial situation and help provide the most suitable solutions to meet their objectives. 

The information in this article is correct as at 20/11/2024. 

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice. 

Levels, bases and reliefs from taxation may be subject to change.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.