Payroll Changes in April 2025 and the Benefits of Salary Sacrifice Pensions

April 2025 marks a significant turning point for employers in the UK, as National Insurance (NI) contributions will see a notable increase. Specifically, the employer’s NI rate will rise from 13.8% to 15%. This change can have a substantial impact on businesses’ payroll expenses and overall budgeting strategies.

However, one effective measure employers can consider to mitigate these rising costs is offering (and encouraging) salary sacrifice pension arrangements. Below is a closer look at the upcoming payroll change and how salary sacrifice pension schemes can provide advantages for both employers and employees.

The April 2025 NI Contribution Increase

  1. Higher Employer Costs
    • The rate of employer National Insurance contributions is increasing from 13.8% to 15%.
    • Even a small percentage increase can translate into substantial costs depending on the size of the workforce and overall wage bill.
  2. Budget Implications
    • Employers must account for higher NI contributions in their payroll budget.
    • This shift may lead to a reassessment of compensation packages and benefit structures to ensure financial stability.
  3. Strategic Adjustments
    • Companies might need to consider more tax-efficient ways of remunerating staff—salary sacrifice being a prime example.
    • Other measures can include reviewing staffing levels, outsourcing strategies, or exploring government incentives designed to alleviate cost pressures.

Salary Sacrifice Pensions: A Cost-Saving Solution

Salary sacrifice pension schemes offer a smart and flexible way to reduce National Insurance liabilities, for both employers and employees. Here’s how:

  1. How Salary Sacrifice Works
    • An employee elects to “sacrifice” a portion of their gross salary in exchange for an equivalent employer pension contribution.
    • Because the employee’s gross pay is reduced, both employer and employee pay less NI (and potentially less income tax), while the pension contribution itself remains tax-efficient.
  2. Benefits for Employers
    • Lower NI Contributions: Reducing the total gross payroll that’s subject to NI can help offset the April 2025 rate increase from 13.8% to 15%.
    • Cost-Effective Employee Benefits: Offering a salary sacrifice pension scheme can be a valuable part of a competitive benefits package, improving employee retention and satisfaction.
    • Corporate Image and Wellbeing: Demonstrating concern for employees’ long-term financial health can enhance a company’s reputation.
  3. Benefits for Employees
    • Reduced Taxable Income: With a portion of salary diverted directly to the pension, employees may pay lower income tax and NI.
    • Enhanced Retirement Savings: Receiving contributions straight into a pension pot can help employees build up retirement savings more effectively.
    • Flexibility and Control: Many salary sacrifice pension schemes allow employees to adjust their contribution levels, giving them a sense of control over their retirement planning.
  4. Implementation Considerations
    • Employee Communication: Transparency is key. Employees should fully understand how salary sacrifice affects their take-home pay, tax liabilities, and pension contributions.
    • Contractual Changes: A salary sacrifice arrangement typically requires a variation to the employee’s contract. Ensuring proper legal documentation and consultation is crucial.
    • Pension Scheme Rules: Not all pension schemes allow salary sacrifice; confirm eligibility and any specific criteria with the pension provider.
    • Minimum Wage Compliance: After the salary sacrifice reduction, employees must still earn at least the National Minimum Wage or National Living Wage, as salary sacrifice cannot reduce pay below the statutory thresholds.

Potential Downsides and Points to Remember

  • Pension Tax Relief Limits: Higher earners may be subject to the tapered annual allowance or lifetime allowance considerations. Salary sacrifice contributions still count towards these thresholds, so it’s important to avoid breaching them inadvertently.
  • Impact on State Benefits: Reducing an employee’s gross salary could affect entitlements to certain state benefits, such as Statutory Maternity Pay or Statutory Sick Pay, which are calculated on average earnings.
  • Flexibility in Changing Contributions: Once you adjust your contract for salary sacrifice, changing the arrangement mid-year can be more complicated and typically requires a qualifying “lifestyle event” or a planned review date set by the employer.

Conclusion

With the rise in employer National Insurance contributions from 13.8% to 15% in April 2025, businesses are seeking effective strategies to manage increased payroll costs. Salary sacrifice pension schemes stand out as a particularly appealing solution, offering a mutually beneficial way for employers and employees to reduce NI liabilities while bolstering long-term retirement savings.

By implementing a well-structured salary sacrifice pension scheme—along with clear communication and careful compliance—companies can create a more efficient payroll system, mitigate the impact of rising NI rates, and support their employees’ financial wellbeing.