From 6 April 2025, Employer National Insurance Contributions (“NIC”) will increase from 13.8% to 15% and the Secondary Class 1 threshold will reduce from £9,100 to £5,000 per year.
This means that for a lot of employers, their costs will be increasing! Employers who employ many employees at lower wages, such as in the hospitality and recreation sector, will be relatively harder hit, due to the threshold reducing for each one.
There are many ways to reward staff tax efficiently by providing benefits that reduce or do not attract income tax and NIC. Below, we have explored some potential options for employers.
Salary Sacrifice
A salary sacrifice arrangement is a contractual agreement between an employee and an employer, where the employee foregoes a portion of their salary for benefits.
The employee would usually be taxed on the higher of the salary foregone or the benefit value. However, there are some scenarios (set out below) where the employee is taxed on the benefit value only – if the benefit value is lower than the salary, or is exempt the employee and employer therefore save on the tax and NIC.
Watch out for national minimum wage though! This is tested against the reduced salary – as are other employment related benefits such as sick pay or redundancy. In addition, the employee’s eligibility for a mortgage may be reduced by the lower salary.
Pension Contributions
The employer agrees to pay the ‘sacrificed’ salary directly into the employee’s workplace pension scheme. As employer pension contributions do not give rise to a taxable benefit, the employee and employer save tax and NIC based on the full amount of salary foregone.
It is common practice for the employer to pass on some/all of the secondary NIC saving thereby increasing the amount being contributed to the employee’s pension.
This could be the easiest win for your business as most employees are contributing to a pension already, so by restructuring the contribution as a salary sacrifice you could help them save quicker.
Cycle to Work
In this scenario, employees agree to give up a part of their salary in exchange for a bike and/or cycling accessories used mainly to cycle to work. Again, this is not a taxable benefit meaning a reduction in tax and NIC on the salary foregone.
From an employee perspective, cycle to work schemes are a great option as they are saving an employee money on buying a bike for commuting purposes and supports an active and healthy lifestyle that is also more environmentally friendly. In addition, the employer can still recover the VAT on the cycle, so only the net cost is passed on to the employee.
Workplace Nurseries
This is where employees agree to give up a part of their salary in exchange for access to a workplace nursery provided by the employer and there is no taxable benefit value.
This option not only reduces the financial burden of childcare but also helps ease the emotional stress of finding reliable childcare as this is employer backed.
Electric Vehicle (EV) schemes
Employees can have private use of an electric vehicle owned (or leased) by the employer in exchange for salary. The salary reduction reduces the tax and NIC position of employee and employer with the employee paying Income Tax on the benefit value – 2% of the list price of the car – rather than the salary foregone.
The employer also only pays Class 1A NIC on the car benefit value.
This can provide employees access to electric cars for a reduced cost to them whilst being environmentally friendly.
Points to note
Whilst salary sacrifice schemes are designed to be straightforward, the agreements between employer and employee need to be overseen by a specialist.
It is important to be aware of certain restrictions and conditions as some benefits may come with extra rules and may not be available to all employees.
Tax-free Benefits
Another way to combat the rising cost of NIC would be to offer non-cash benefits/tax-free benefits to employees. Whilst this will not reduce NIC, it will provide valuable benefits to employees, increasing both retention and satisfaction.
Such benefits include:
It is worth noting that certain conditions must be met to ensure that these benefits are free of tax and NIC.
Please let us know if you want tailored advice relevant to your business.
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