Make the most of pension salary sacrifice to manage National Insurance increases

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Discover how pension salary sacrifice can help businesses of all sizes

The October 2024 Budget set out ambitious plans for UK economic growth over the next five years. Part of the cost of fulfilling those plans landed at the door of businesses, in the form of higher employer National Insurance Contributions (NICs).

From April 2025, employers’ NICs will increase from 13.8% to 15% and the earnings threshold will fall from £9,100 to £5,000. For an employee on the average UK earnings of £36,036, the employers NIC cost in 2025, is 25% more compared to 2024.

Businesses of all sizes will be bracing themselves for higher costs from the changes, but for small and medium-sized businesses (SMEs) the increases may feel particularly acute. Although the employment allowance (which allows eligible smaller employers to reduce their NICs liability) will increase from £5,000 to £10,000, every aspect of pay and benefits spend is likely to be put under intense scrutiny.

SMEs might think about reducing their benefits spend to offset growing NIC bills. But they will still need to be able to attract and retain talented employees who expect a top-quality benefits package alongside their salary. A competitive package is especially vital for SMEs as they compete for the same skills and talent as larger, better-established employers.

New research from Howden Employee Benefits, From Insight to Impact: exploring the employee benefit trends shaping UK SMEs, found that over half (55%) of SMEs say their employee benefits package impacts their ability to attract and retain employees. We also found that 37% of SMEs say potential hires ask about pensions in job interviews, reinforcing how important retirement saving is as an attraction and retention tool.

Our research surveyed 901 business decision-makers in the UK with less than 250 employees. This covered a range of different sectors and aimed to find out about the current benefits priorities and future plans. Data was gathered in mid-2024, before the October Budget.

Pensions salary exchange: a silver lining

However, there was also some good news in the Budget for NICs and employee benefits. Despite swirling rumours before the event, the Chancellor decided that employer pension contributions will continue to be exempt from employer NICs.

Pension salary exchange (also known as salary sacrifice), gives businesses a great opportunity to reduce their NIC costs while boosting employee benefits. And as salary exchange lowers employees’ taxable salaries in exchange for pension contributions, that means they will also pay less tax and NICs.

Our research found that economic challenges with the cost-of-living crisis is one of the top two factors impacting businesses and their workforce for 50% of SMEs, so enabling employees to save for retirement, as well as paying less tax and NICs, is a clear way to help. As 85% of SMEs in our survey said that they offer a workplace pension (and auto-enrolment requires every employer to provide a scheme), this is an opportunity for every SME.

SMEs already know that they need to improve their pension offering, with 40% expecting to introduce or make changes to their scheme in the near future.

Thriving SMEs will ultimately play a major role in driving the economic growth that the government wants to see. The additional cost of employer NICs will be challenging for employers, but businesses can mitigate some of the burden through pension salary exchange, while also improving their employee benefits. That will help to attract the talent that they need to expand for the future.

Howden Employee Benefits can help your business make the most of pension salary exchange as part of a wider benefits strategy - talk to us to understand how we can help your business.