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Vinku Shah says it may be worth considering a pension salary sacrifice, a tax-efficient strategy to cushion the impact of rising national insurance contributions…

Employers’ national insurance contribution (NICs) rates went up from April 6, 2025, from 13.8 per cent to 15 per cent. The level at which employers start paying NICs (the secondary threshold) has also been reduced from £9,100 to £5,000 per annum.

Although relief is available for smaller independent contractors with the increase of the annual employment allowance from £5,000 per annum to £10,500 per annum, multiple pharmacy owners are facing substantial increase in employment costs.

It may be worth considering a pension salary sacrifice which is a tax-efficient strategy in offsetting rising national insurance (NI) contributions for both employers and employees.

How pension salary sacrifice works

Pension salary sacrifice is an arrangement where an employee agrees to reduce their gross salary in exchange for an employer making an equivalent contribution to their pension scheme. The key benefits are as follows:

1.     Reduced national insurance contributions (NI):

o   Employer’s side: The employer’s National Insurance liabilities are calculated based on the employee’s gross salary. By reducing the gross salary through salary sacrifice, the employer pays less in employer NI contributions.

o   Employee’s side: The employee’s salary is reduced for NI purposes, so they pay less in employee NI contributions as well.

2.     Tax efficiency:

o   Employer’s tax relief: Since the employer no longer pays NI contributions on the sacrificed portion of the salary, they effectively save on employer NI and may choose to pass those savings on to the employee in the form of higher pension contributions.

o   Employee’s tax relief: The employee also benefits from tax relief on the pension contribution, as the sacrificed amount is deducted from their gross salary, reducing their taxable income and hence their income tax liability.

How it offsets rising national insurance contributions

With the rising cost of NICs, both employees and employers will see higher deductions from pay. A pension salary sacrifice arrangement provides a proven strategy to reduce the overall impact:

1.     For employers

o   Employer NI contributions are 15% above the £5,000 threshold but salary sacrifice reduces the employer’s total NI bill, allowing them to allocate the savings into the employee’s pension fund.

o   This means that the employer’s overall wage costs are reduced, which can help mitigate the impact of higher employer NICs.

o   In addition, employers may offer more competitive pension contributions, which boosts employee satisfaction and retention. These would also be tax deductible expenditure for corporation tax.

2.     For employees

o   By reducing their salary (for tax and NI purposes), employees may fall into a lower NI and income tax bracket. This means more take-home pay is available, even though the total compensation (salary + pension contributions) remains the same or even increases due to employer contributions.

o   The employee’s overall tax burden decreases because the pension contributions are made pre-tax, reducing taxable income.

Example: How it works in practice

Let’s look at a practical example to demonstrate the impact on annualised figures:

• Employee's original salary: £40,000 per year.

• Employer's national insurance: 15% on anything above the threshold of £5,000.

• Pension salary sacrifice arrangement: The employee agrees to sacrifice £5,000 of their salary for pension contributions.

Before salary sacrifice:

• Employer’s NI liability: £40,000 - £5,000 = £35,000 (taxable amount) * 15% = £5,250.

• Employee’s NI and income tax would be calculated based on the full £40,000 salary.

After salary sacrifice:

• The employee’s new salary is £35,000.

• Employer’s NI liability: £35,000 - £5,000 = £35,000 * 15% = £4,500 (a saving of £750).

• Employee’s NI and income tax are now calculated on £35,000 (reduced taxable income).

• The £5,000 salary sacrifice is paid directly into the employee’s pension scheme, providing the employee with a tax-efficient way to save for retirement.

Outcome:

• The employee benefits from a higher pension contribution, a reduction in their National Insurance and income tax, and an increase in their overall take-home pay.

• The employer saves on their NI liability and can either redirect those savings into the employee’s pension or use them elsewhere in the business.

Additional considerations

• Employee buy-in: For the salary sacrifice arrangement to work, employees need to understand that although their gross salary is reduced, they are receiving the equivalent in pension contributions, which will benefit them in the long term.

• Impact on benefits: Employees should consider whether a reduction in salary could affect other benefits tied to salary, such as mortgage applications or life insurance. However, the pension contributions may help offset any long-term concerns.

• Voluntary scheme: Both the employee and employer must agree to the salary sacrifice arrangement, and it is often part of a broader employee benefits package.

• Salary bands: This may only be attractive to higher paid employees who are able to put money away for retirement.

• Other schemes: Salary sacrifice is not limited to pension but can be extended to other benefits to attract talent like offering electric car salary sacrifice scheme but that may require benefits-in-kind reporting.

Conclusion

Pension salary sacrifice is an effective and proven strategy for offsetting rising National Insurance contributions. It offers mutual benefits for both the employer (lowering NI liabilities) and the employee (increasing pension contributions and reducing tax/NI).

It’s a win-win arrangement, especially as businesses look for ways to manage rising employment costs while improving employee retirement savings.

If you're an employer, this strategy can make a real difference in managing costs while enhancing employee engagement and satisfaction. For employees, it's a way to legally reduce your tax burden and boost your retirement savings at the same time.

Vinku Shah FCCA is a chartered certified accountant and partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or vinku.shah@silverlevene.co.uk