In April 2025, new rates of Employer National Insurance Contributions (NICs) will take effect. This is a cause for concern for many businesses, as their employment costs are due to increase significantly in line with the new regulations.

Many companies have suggested redundancies or recruitment freezes are needed to offset these costs. However, there is another route you can take, known as Salary Sacrifice (sometimes known as Salary Exchange), which can save your business money in employment costs, while giving your staff a better net income.

In this blog, I’ll outline what it’s all about.

What is Salary Sacrifice?

Salary Sacrifice is an agreement made between a business and an employee to give up a portion of their salary in exchange for a non-cash benefit. The key here is the reduction of the employee’s taxable income (which means they pay less Income Tax and National Insurance).

In exchange for the reduced salary, the employer provides the employee with a non-cash benefit, such as:

• Pension contributions
• Childcare arrangements
• Company cars
• Other Benefits in Kind

Salary Sacrifice example

Below is an example of how Salary Sacrifice can create savings for both employer and employee. Please note this is just an illustrative example and will be subject to various other factors.  

This example is based on a qualified earning pension scheme, the employee and employer contributing the minimum amount to pension at 5% and 3%.

Essentially, these are the minimum savings available.

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If you would like a true calculation, get in touch and we will be happy to provide a demonstration that is tailored to your situation, whether as an employer or employee.

How Salary Sacrifice benefits the business

Put simply, Salary Sacrifice reduces employer costs. In particular, Salary Sacrifice can lead to a significant reduction in Employer NICs. At a time when businesses are already feeling the squeeze, this can make a huge difference to cash flow.

Gravitate Accounting plans to use Salary Sacrifice to reduce the cost of April’s NIC increase by 22%, while leaving employees better off overall. We discussed this in detail in a recent webinar, which you can recap above

Employee attraction and retention

An attractive salary sacrifice scheme is a considerable benefit for employees, which can make companies more appealing for both existing and potential employees, as well as improving employee retention.

How Salary Sacrifice benefits employees

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They pay less Income Tax and NICs

By sacrificing a portion of their salary, their taxable income is lowered, which means less income tax is payable. NICs are also calculated on gross salary, so these will also be reduced.

Access to attractive benefits

Salary Sacrifice schemes mean employers can provide attractive benefits like cycle-to-work schemes, company cars or certain childcare arrangements which might not be economically feasible otherwise.

Important considerations

Salary Sacrifice is smart way to reduce employer costs and boost the overall financial position of employees, or provide attractive, tax-efficient benefits. However, there are some important considerations and rules to follow.

• Salary sacrifice arrangements must not reduce an employee’s cash earnings below the National Minimum Wage threshold.
• Employees must be made aware that salary sacrifice can potentially impact their entitlement to certain benefits.
• Existing employees must consent to a salary sacrifice scheme – it cannot be mandatory, and employees must be able to opt out if they wish.
• Changes must be correctly recorded in contracts of employment.
• Historically, salary sacrifice has impacted the lending ability of an individual due to the lower gross salary. Nowadays your employer can provide a letter confirming the Salary Sacrifice scheme is in place which should suffice from a lending perspective
• Employers should ensure equality and fairness when implementing salary sacrifice. While they don't have to offer every scheme to everyone, they should avoid discriminatory practices.

The Gravitate Team are already advising several of our clients on how they can use Salary Sacrifice effectively in their organisation. If you would like to explore this option, please get in touch.