Many businesses are currently bracing for the upcoming changes to National Insurance (NI) which are set to have a big impact on employers across the UK. Rachel Reeves announced during the 2024 Autumn Budget that employer National Insurance contributions (NICs) will rise, while the earnings threshold at which employers start paying NI will drop, starting from the 2025/26 tax year.

I totally sympathise with the Chancellor’s need to raise money. We all know about the “black hole” she is facing in public finances and these changes are expected to raise a much-needed £25 billion a year. But the NICs increase will almost certainly have some serious consequences for many businesses – including not for profit organisations and small businesses.

SMEs, many of which are already managing tight margins, are going to be hit hard by these changes. Research* suggests that 37% of UK SMEs now cite tax as one of their biggest challenges and that 44% of UK SMEs say the increase in NICs will negatively impact them. The increase in employer NI contributions means it will cost businesses more to employ people and the figures are stark. With approximately 16.6 million employees working for SMEs in the UK, employer NI contributions will rise by £14.97 billion, from £54.75 billion to £69.72 billion annually. 

Higher NI contributions are likely to lead to cost-cutting measures, such as reduced hiring and frozen wages. To manage these additional expenses, employers might also consider reducing employee benefits, such as pension contributions, to maintain their financial stability. This could lead to lower pension contributions for employees, directly impacting their retirement savings – and many people in the UK are already not saving enough for their retirement. 

We’re already looking at a pensions crisis in the UK, with people across generations not saving enough into their pensions. Gen Z, Millennials and even Gen X (the oldest of whom are already in their late 50s) have saved far too little to support themselves after work. It doesn’t make sense that we would make it even more challenging to get money into their pensions while we still have time to do so. Clearly the challenges we’re facing right now are huge, but are there any solutions out there?

What is salary sacrifice?

Salary sacrifice, also known as salary exchange, allows employees to redirect a portion of their pre-tax salary into non-cash benefits, such as pensions. This arrangement reduces the employee’s taxable salary, leading to savings on both employee and employer NI contributions. For employers this can be hugely beneficial – by lowering the gross salary through salary sacrifice, employers decrease the amount subject to NI, thereby reducing their overall NI liability. It can also be helpful in overall cost management –salary sacrifice schemes can help offset the increased costs due to the NI rate hike and threshold reduction, aiding in maintaining financial stability. 

The figures are impressive – across the UK, through the implementation of salary sacrifice schemes, the increase in NICs could be reduced by an estimated £4.11 billion.

It’s important to note that salary sacrifice isn’t just a cost-saving tool; it also encourages better retirement savings. Employees benefit from increased pension contributions, while employers save on NI costs—a win-win scenario.

Raising Awareness

Despite its advantages, salary sacrifice remains underutilised, partly because it hasn’t been widely communicated as a strategic response to rising NI costs. As businesses focus on immediate challenges, this simple yet effective tool often flies under the radar. This needs to change.

Rather than reinforcing the message that their hands have been tied and they have no choice but to hike business taxes, the government could be educating SMEs on the dual benefits of salary sacrifice: cost reduction and improved employee financial well-being. If they are able to persuade beleaguered, overwhelmed SME owners that this isn’t a complex tax strategy but, rather, is a straightforward way to manage rising costs while supporting staff, they could be throwing a lifeline to pressurised businesses. Right now they need all the help they can get. 

*Research from Moore UK