Lucy McCaskill , Senior Consultant at Aon, looks at why Employers should review salary sacrifice arrangements ahead of the NIC increases

With the increase in employers National Insurance (’NI’) rates, coupled with the reduction in the lower threshold at which NI applies, UK employers are braced for increased costs from April 2025.

Aon’s Lucy McCaskill says companies should take the opportunity to review their pensions salary sacrifice arrangements in order to identify any extra cost savings and to avoid the risk of additional financial burdens.

Pensions salary sacrifice is a well-trodden path for most employers as it allows them and their employees to save NI on the amount of the employee pension contribution. However, not all salary sacrifice arrangements are set up to maximise the savings available.

Aon’s 2024 DC Pension Scheme Survey showed that one in 10 employers are still not using pensions salary sacrifice. This is often the case where there is an overseas parent company that is less familiar with UK pension and tax rules. There are also companies who simply haven’t considered it. In these situations, introducing salary sacrifice could make a huge difference and could offset most of the forthcoming NI cost increases.

However, even for employers that already have salary sacrifice in place, there may be opportunities to increase the savings available:

Applying salary sacrifice to additional contributions – Some schemes were set up for core employee contributions only, with any additional top ups falling outside of salary sacrifice. This may have been done to avoid any risk of high contribution levels taking employee salaries below the National Living/Minimum Wage, but improvements in payroll automation mean this can often be managed on a month by month basis.

Bonus sacrifice – Our 2024 research found that 4 in 10 employers do not offer employees the opportunity to sacrifice some or all of a bonus into their pension. While this requires careful communication to employees, it has the potential to deliver significant cost savings.

Using payroll automation – Historically, participation in salary sacrifice schemes was restricted to those above a minimum salary level. This ensured that the employer did not breach minimum wage levels and that the employee did not lose out on any salary-related state benefits. For employers with a large number of lower earning roles this could mean many employees were excluded. However, providing the contractual wording is set up correctly, modern payroll systems are able to carry out checks and switch people in and out of salary sacrifice on a monthly basis. This can result in more people able participate in salary sacrifice.

Redundancy sacrifice – The first £30k of a redundancy payment is usually tax free, but employees being made redundant may benefit from the option to sacrifice amounts above this level into their pension, particularly where they are nearer to retirement age.

Our calculations show that for a medium sized UK employer with 500 employees, the annual salary sacrifice cost savings for the employer could increase from £128k to £322k by taking into account all of the above points. While this will not offset all of the increase in employer’s NI, which is estimated to be around £493k for the same employer, it would certainly go a significant way to help offset the cost. In this example the average NI saving for employees is £344 per year in addition to the employer savings.

While the savings can be significant, it is important to remember that there are risks associated with not operating salary sacrifice correctly. Even if an employer is already utilising all of the potential savings set out above, they should review their arrangement prior to the April NI and minimum wage changes.

Where a salary sacrifice arrangement is not set up correctly which has resulted in employees having been underpaid the minimum wage, the arrears that are repaid to the employee must take account of the length of time that has elapsed since the underpayment. If the salary sacrifice arrangement itself is not valid, then employers could face a sizable tax bill on top of the NI increases.

My top tips to ensure your salary sacrifice arrangement remains compliant are:

  • Check appropriate wording is used to amend an employee’s Terms & Conditions for the sacrifice to be valid
  • Ensure any changes are made before the employee is entitled to the renumeration
  • Use up to date information in any supporting documentation
  • Apply the latest tax and minimum wage thresholds
  • Remember that the savings are based on employee pension contributions, so remind your employees how to save more into their pension where this is appropriate

Aon’s DC pension survey can be downloaded here.