As of 6 April, the rise in National Insurance contributions (NICs) has taken effect, meaning businesses are likely to feel a strain on their wallets. However, research shows that only 48% of companies are utilising salary sacrifice as a strategy to offset these additional costs. As a result, many employers and employees are missing out on an effective way to reduce National Insurance expenses.

What is salary sacrifice?

Salary sacrifice (otherwise known as salary exchange) is an arrangement in which an employee agrees to give up a portion of their salary in exchange for an equivalent contribution by their employer to their pension. In other words, the employee's gross salary is reduced, which in turn lowers the amount of National Insurance (NI) the employer has to pay, since NI contributions are based on gross earnings.

This reduction in salary also leads to lower employee NI contributions, which can result in significant savings, especially for higher-earning employees. 

Advantages of salary sacrifice

Salary sacrifice can result in reduced NI contributions for employees resulting increased take home pay, larger pension contributions (where the employer shares some or all of their savings from reduced employer NI contributions with employees through a further increase in pension contributions) and thus improved retirement benefits.

Employers will see reduced NI costs and enhanced employee benefits, which can improve recruitment and retention.

Disadvantages of salary sacrifice

Many employees might not fully understand the impact of salary sacrifice on their overall compensation package and its impact on statutory benefits. As such, employers considering implementing salary sacrifice need to ensure their employees are properly informed.

Implementing salary sacrifice will require changes to employees’ terms and conditions (requiring employee consent) and employers will need to ensure that they have sufficient measures in place to monitor National Minimum wage compliance and other regulatory requirements. 

For more information

If you're considering implementing a salary sacrifice scheme for your employees or would like to learn more, feel free to get in touch with me or Doug Mullen for further guidance and information.