Using salary sacrifice to offset rising employer NIC costs
One of the key strategies businesses should consider is salary sacrifice, especially in the current climate of rising employer National Insurance contributions.
With employer NIC rising from 13.8% to 15% from 6 April 2025, the need to explore tax-efficient approaches like salary sacrifice has never been more pressing.
What is salary sacrifice and how does it work?
A salary sacrifice arrangement is where an employee gives up part of their gross salary in return for the employer providing a non-cash benefit (for example, pension contributions or other qualifying benefits).
The idea is that, by reducing the cash salary, both the employer and employee can save on National Insurance contributions.
Because sacrificing salary lowers the employee’s taxable pay, it can reduce the amount of NIC and income tax due.
At the same time, the employer pays less NIC on the reduced cash salary portion, improving its cost base.
Why salary sacrifice still has value despite valuation rules
Since 6 April 2017, HMRC introduced “alternative valuation rules,” which removed many of the tax advantages previously available through sacrificing salary.
However, some benefits remain outside those rules — and sacrificing salary can still deliver savings on those. The prime example is pension contributions.
For benefits that are not caught by the alternative valuation regime (such as employer pension contributions, cycle-to-work schemes, etc.), salary sacrifice arrangements continue to offer NIC savings for both parties.
Example: pension contributions via salary sacrifice
Suppose an employee wishes to top up their pension by making an additional contribution of £500 per month.
Under a conventional arrangement, the employee would pay NIC on that £500 and the employer likewise would also pay NIC on it.
Under a salary sacrifice scheme, the employee gives up the £500 of cash pay; their gross salary is reduced by that amount, and instead the employer directly contributes £500 to the pension.
The employee saves on NIC (and possibly income tax), and the employer also pays lower NIC on the reduced salary — all while the pension still receives the full £500.
In effect, both sides benefit, but only if the benefit in question is eligible (i.e. outside the alternative valuation rules).
Practical considerations when using salary sacrifice
Contractual adjustments
To implement sacrificing salary, you must amend the employee’s employment contract to reflect the reduced cash salary and the provision of the benefit.
It is crucial that the employee cannot unilaterally revert to the higher salary at will.
Impact on other benefits and entitlements
Reducing the nominal cash salary might affect entitlement to other benefits (e.g. statutory maternity pay, pension auto-enrolment thresholds, redundancy calculations).
You must carefully assess whether those downstream effects outweigh the NIC savings.
Eligibility and benefit types
Not all benefits qualify for salary sacrifice. Benefits outside the alternative valuation regime—such as pension contributions or certain cycle-to-work arrangements—are the prime candidates.
For other benefits, salary sacrifice may no longer yield advantage under current HMRC rules.
How salary sacrifice helps mitigate the NIC increase
With the employer NIC rate rising from 13.8% to 15%, every percentage point matters. A properly structured salary sacrifice scheme can help reduce the employer’s NIC liability on cash salary, thereby softening the financial impact of the increase.
In parallel, employees may also benefit through reduced NIC payments, provided the sacrificed salary is outside the thresholds that would eliminate the benefit.
If enough of your workforce are participating, the aggregated NIC savings can be significant.
The more benefits you can channel through sacrificing salary (within compliance), the more you can mitigate the cost burden.
When salary sacrifice is not beneficial
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Where the benefit is captured by the alternative valuation rules, the tax advantage may be nullified.
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If the salary reduction pushes employees below thresholds for essential benefits (statutory payments, pension auto-enrolment minimums), you might inadvertently reduce their rights or protections.
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If administrative burden or legal complexity undermines the net gain, the effort may not be worthwhile.
You must run a thorough cost-benefit analysis before implementing any scheme.
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How Trueman Brown can help you with salary sacrifice
If you’d like expert guidance on whether salary sacrifice is right for your business, Trueman Brown are here to assist. We can:
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Review your current pay and benefits structure
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Model NIC and tax savings from sacrificing salary
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Ensure correct drafting of contracts and compliance with HMRC rules
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Monitor ongoing compliance and adjust the scheme as rules evolve
Feel free to reach out to us directly: email mark@truemanbrown.co.uk, or call 01708 397262, and we’ll be happy to explore how salary sacrifice might benefit your business.
Frequently Asked Questions (FAQ)
Q1: What exactly qualifies for salary sacrifice?
A: Generally, only benefits outside HMRC’s alternative valuation rules—such as pension contributions, cycle-to-work schemes, and certain childcare vouchers—are viable candidates for sacrificing salary.
Q2: Does salary sacrifice reduce income tax as well as NIC?
A: Yes — by reducing the employee’s taxable pay it can reduce both NIC and income tax, although the primary impact is often on NIC savings.
Q3: Do I need to change employee contracts to use salary sacrifice?
A: Yes. You must formally vary the employment contract to reflect the reduced cash salary and provision of the benefit, and the variation must be agreed by both parties.
Q4: Could salary sacrifice affect other entitlements (e.g. maternity pay)?
A: Potentially yes. Since many statutory payments and benefits are based on “salary” or “earnings,” reducing salary could impact those calculations. You should check for unintended knock-on effects.
Q5: Is salary sacrifice always worthwhile?
A: Not always. Its effectiveness depends on the specific benefit, the employees’ tax and NIC position, and how large the savings are versus administrative cost. A tailored analysis is essential.
Q6: Can employees exit a salary sacrifice scheme at any time?
A: No — once the contract is varied, the employee cannot unilaterally revert to the higher salary at will. The arrangement must be stable and clearly documented.
If you have more questions about salary sacrifice, or want help designing a compliant, tax-efficient scheme, just get in touch with us at mark@truemanbrown.co.uk or 01708 397262.
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