Offset the Employer National Insurance rise by changing your workplace pension to a salary sacrifice pension.
From April 2025, employer national insurance will be increasing from 13.80% to 15%. For many companies this will increase their running costs significantly.
A way to mitigate the costs could be to change your workplace pension scheme to a salary sacrifice pension. There are three main ways to contribute to a workplace pension and how to calculate the best option for you and your employees can be difficult.
Types of Workplace Pension Contribution
Qualifying Earnings are the earnings used to calculate pension contributions in the UK workplace pension schemes, specifically under the automatic enrolment rules. For the 2024/25 tax year, qualifying earnings include income between £6,240 and £50,270, covering wages, salary, bonuses, and overtime. Contributions from both the employee and employer are calculated based on this range, and it helps determine how much is paid into the pension pot.
Relief at Source is a method of automatically applying tax relief to pension contributions in the UK. When you contribute to a pension under this system, your pension provider claims tax relief from the government at the basic rate (20%) on your behalf. For example, if you contribute £80, the provider adds £20, making your total contribution £100. Higher-rate taxpayers can claim additional relief through their self-assessment tax return. This system simplifies the process by providing immediate tax relief, making it easier for individuals to save for retirement. However, non-taxpayers won’t benefit from this relief, and the system is typically used for personal pensions and some workplace pensions.
Salary Exchange (also known as salary sacrifice) is a pension contribution arrangement where an employee agrees to reduce their salary in exchange for an equivalent contribution to their pension. The employer then makes the contribution directly to the pension scheme, often at a higher amount than the employee’s original salary deduction. This reduces the employee’s taxable income, potentially lowering their income tax and National Insurance contributions. It’s a tax-efficient way to boost retirement saving. – In addition, companies can pay all or part of the employer national insurance saving into the pension, or they can keep this back to create a saving for the company.
Relief at Source vs Salary Sacrifice: Example
Johyer Ltd are currently on a relief at source scheme but wish to change their scheme to a salary sacrifice scheme. They have a total annual basic earning bill of £1,098,288.
They have three options in respect of the Employer National Insurance saving:
Option 1: Pay all of the 15% Employer National Insurance saving into employee’s pensions to provide a maximum uplift of total contributions paid into the individual’s pension.
Option 2: Pay half of the 15% Employer National Insurance saving into employee’s pensions (i.e. 7.5%) to provide some uplift of total contributions paid into the individual’s pension.
Option 3: Retain all of the 15% Employer National Insurance saving to make savings to the company. There are still benefits to employees because:
a) mostly they will get a little more cash in hand per month
b) High Rate tax payers do not need to reclaim the higher rate tax via their self-assessment.
Johyer Ltd have chosen Option 2, agreeing to pay half of the 15% Employer National Insurance saving into employee’s pensions (i.e. 7.5%).
The Potential Positive Impact
Let’s break this down a bit further into the potential positive impact Option 2 can have for both the employee and the employer.
Employee Position
| Relief at Source Scheme | |
|---|---|
| Basic Salary | £35,000 |
| 3% employer gross pension contribution | £87.50 |
| 5% employee net pension contribution | £116.67 |
| Basic rate tax relief | £29.16 |
| Total | £233.33 |
| Salary Sacrifice (exchange) Scheme | |
|---|---|
| Basic Salary | £35,000 |
| 5% salary sacrifice (exchange) | £1,750 |
| Post salary sacrifice (exchange) salary | £33,250 |
| 3% employer gross pension contribution | £87.50 |
| 5% employee gross pension contribution | £145.83 |
| Half of employer NI saving paid (7.5%) | £10.98 |
| Total | £244.31 |
Company Position
Johyer Ltd have a total basic annual earnings bill of approximately £1,098,288.
Currently the company pays employer national insurance saving to the HMRC on all their employees’ basic salary. By changing the scheme to salary exchange, they have the option save costs.
| Relief at Source Pension | |
|---|---|
| Monthly basic earnings wage bill | £93,617.65 |
| Employer National Insurance at 15% (considering allowances) | £12,230.15 |
| Total employer National Insurance costs per year | £146,761.80 |
| Salary Sacrifice (exchange) Pension | |
|---|---|
| Monthly basic earnings wage bill | £93,617.65 |
| Monthly post salary exchange basic earnings wage bill | £88,936.86 |
| Employer National Insurance at 15% (considering allowances) | £11,528.01 |
| Total employer National Insurance costs per year | £138,336.12 |
| Company saving per year | £8,425.68 |
This saving can then then be retained by the company or paid into the employees’ pension to provide an uplift.
Pros and Cons
As demonstrated above, salary sacrifice pensions reduce the amount of income tax and national insurance contributions for employees, providing more cash in hand in comparison to the Relief at Source method.
Some of the additional pros are:
- Gives employees incentive to increase how much they are contributing to their pension policies, as they are reducing deductions from their annual salary
- Provides an opportunity for employers to uplift the pension contributions with the national insurance savings, which can increase your desirability as a company to work for
- Means that higher rate tax earners do not need to reclaim their high rate tax via their self-assessment
There are also a few potential cons to be aware of:
- 12 month contract makes it more restrictive to make adjustments to employees contributions during this period
- May lower the amount you can borrow for mortgages, as your annual salary has been reduced, although lenders now mostly look at pre sacrificed earnings.
Finding the Best Option for Your Business
Understanding the right approach for your company is complicated. The above examples provide just a basic snapshot of the potential benefits of switching to a salary sacrifice scheme, but this approach may not be right for all companies.
What is certain, since the introduction of workplace pension legislation, how the schemes were set up then may not be the most efficient for companies or their employees today. With the imminent rise in employer national insurance contributions this could potentially impact your business.
If you haven’t reviewed your company pension in the last 3-5 years, we would recommend you undertake a review to ensure the scheme is set up in the best way. Let Bigmore Benefits help you do just that.
Article by Dave Sykes
Director of Bigmore Benefits
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