National Insurance Increases and Rising Business Costs: How Salary Sacrifice Pensions Can Help

In today’s economic climate, UK businesses are facing mounting financial pressures, and recent increases in National Insurance (NI) contributions have added to the challenge. For employers, this increase impacts not only the bottom line but also the delicate balancing act of remaining competitive in attracting and retaining talent. Amid these pressures, employers are exploring ways to ease the NI burden, with one increasingly popular solution being salary sacrifice pension scheme.

Not only does this arrangement reduce the NI bill, but it also enhances employee benefits—making it a strategic choice for businesses that want to support both their finances and their people.

National Insurance Increases and Rising Business Costs: The Challenge for Employers

Over the past year, employers have been hit with various new costs, from rising energy prices to wage inflation, and now increased NI contributions. These changes come at a time when businesses are under pressure to pay higher wages to keep pace with inflation and meet employee expectations for higher salaries. For many employers, these new expenses are difficult to offset, leaving them searching for strategies to mitigate the additional costs.

The NI increase to 15%, may seem manageable at an increase of 1.2% on employer contributions. However, when you consider the sizeable reduction in the earnings threshold to only £5,000, this can mean significant additional costs for business owners, depending on the size of the workforce and salary levels.

For some employers, the additional NI could represent thousands—or even millions—of pounds annually. At the same time, high turnover and challenges in recruitment require businesses to improve their employee value proposition to attract and retain staff. But how can employers meet these challenges while keeping costs manageable?

Salary Sacrifice Workplace Pensions: A Strategic Solution

A salary sacrifice pension scheme can be a powerful way to reduce NI costs while simultaneously boosting the attractiveness of employee benefits. Here’s how it works:

- NI Savings for Employers: In a salary sacrifice arrangement, employees agree to "sacrifice" a portion of their gross salary, which is then contributed directly to their pension. Because the employee’s salary is technically lower, both the employee and employer pay reduced NI contributions. For employers, this can lead to significant savings on NI, especially for companies with larger workforces.

- Enhanced Employee Benefits: Offering an attractive pension scheme is a major perk for employees. By incorporating employer NI savings into pension contributions, companies can further enrich the value of these schemes, enhancing employee financial well-being—a key factor in staff satisfaction and retention.

For some employers, the additional NI could represent thousands—or even millions—of pounds annually.

How Salary Sacrifice Pensions Can Attract and Retain Talent

Today’s workforce values comprehensive benefits packages, especially those that provide long-term financial security. A well-structured pension scheme, particularly one that maximises both employer and employee contributions, has become a sought-after benefit for employees.

With salary sacrifice, employers can:

1. Increase Contributions: Employers can choose to pass on a portion of their NI savings back into employee pensions. This small increase can enhance the pension benefit, making employees feel supported and valued.

2. Improve Employee Loyalty: A robust pension scheme adds a layer of financial security for employees, making it a valuable differentiator. When workers see that their employer is investing in their long-term financial future, it fosters loyalty and reduces staff turnover.

3. Enhance Recruitment Efforts: An attractive pension scheme is a major draw for new hires. With younger generations increasingly aware of the importance of retirement planning, a pension with added NI savings and tax efficiency can set an employer apart in a competitive hiring landscape.

A Win-Win for Employers and Employees

Salary sacrifice pensions are proving to be an effective, flexible solution for today’s business challenges. They address the immediate issue of rising NI costs while offering a long-term, valuable benefit that appeals to employees across all career stages. As a cost-effective way to support the financial well-being of both the business and its workforce, a salary sacrifice pension can serve as a critical part of an employer’s broader strategy to remain financially resilient while staying competitive in today’s hiring market.

A Few Things to Consider

• Implementing a salary sacrifice arrangement is likely to involve a change in contractual terms.

• Given the effective reduction in base salary this could have an impact upon lending capacity, and also state benefits for the employee.

• Depending on contractual terms, employees may also have a reduced entitlement to Death In Service benefits, if the benefit is based on a multiple of salary.

• Salary sacrifice deductions cannot leave an employee's salary below the national minimum wage.

Thinking of Setting Up a Salary Sacrifice Workplace Pension?

Please do get in touch if you’re a business owner or HR Director looking to implement or improve a salary sacrifice pension scheme. Ella Rose Financial would be happy to advise on how to tailor it to your workforce needs. By exploring this option, you may find it not only helps manage NI costs but also boosts your appeal to a workforce looking for financial security and support.