When the rate of employer national insurance contributions (NICs) jumps from 13.8% to 15% from 6th April 2025, the cost of employing someone on a median salary will increase by £900 a year, according to the Institute for Fiscal Studies (IFS).
In response, salary sacrifice schemes, also known as salary exchange, which enable employees to receive some of their pay in the form of a non-cash benefit, are set to become increasingly used.
Not only can these schemes, ranging from childcare vouchers and bikes to pensions and holiday buy, make employee benefits more affordable for employees, but they can also potentially save employers hundreds of thousands of pounds in National Insurance Contributions (NICs). Critical to success, is ensuring schemes are properly optimised and communicated to employees.
Don’t restrict opportunities to opt into salary sacrifice schemes
Traditionally, salary sacrifice schemes tend to be opened up once a year, for employees to sign-up for a non-cash benefit during an annual benefits period, when they first join the company or at the start of a 12-month scheme. Although this can help to keep things simple for the person administering the scheme, it may restrict the number of people opting in and therefore the potential savings.
For example, not all employees will be ready to purchase a new bike through a salary sacrifice scheme at the start of an annual benefits window. So even though this might appear to keep it easier to keep track of when a twelve-month scheme is due to come to an end, it may be better to offer salary sacrifice schemes such as this all year round.
To help avoid this becoming an ongoing administrative challenge, advances in employee benefits software can be used to automatically allow employees to opt into schemes. As well as connect with suppliers and payroll to take the correct deductions and stop payments once they’ve bought their bike, for example, so no one is charged for longer than they should be.
Make salary sacrifice schemes the default option
Another reason salary sacrifice schemes fail to generate the full tax and national insurance savings possible, is due to leaving it up to employees whether or not to have a core benefit, such as employee pension contributions, paid via salary sacrifice. This requires employees to understand the complexities of a pension salary sacrifice scheme themselves, which may lead some employees to shy away from opting into something that could have helped them, and their employer, save money.
Instead of making core benefits an optional salary sacrifice scheme, making them a default option for employees to opt out of would encourage many more people to remain opted in.
Alternatively, if you still want to leave it up to employees to opt in, consider using visual tools and calculators to help employees better understand the options on offer. For example, by showing employees how much tax they can save by making their pension a salary sacrifice scheme, and how much this could increase their pension pot by if the savings were reinvested.
Use simple language to educate and explain
For some employees, the language used to describe ‘sacrificing’ some of their salary, may be worrying and make it feel like they might be losing out. It can therefore be easier to explain ‘salary sacrifice deduction’ in terms of ‘salary exchange’ and how they would be exchanging some of their salary to have a valued benefit in place of this.
Similarly, some of the rules around salary sacrifice deduction, or exchange, can be very confusing, as not all benefits generate the same tax savings and basic rate taxpayers are eligible for different savings compared to higher rate taxpayers. Also, people close to the national minimum wage or on very variable pay might not be eligible at all.
All of this could become confusing to individuals, and deter them from wanting to participate, so it can again be worth using employee benefits software to show employees what they are eligible for, and exactly what they can expect to save. Segmented campaigns can also be used to promote different benefits to different rate taxpayers.
Link salary sacrifice arrangement to your wider people strategy
Another way to help optimise take up is to ensure your salary sacrifice schemes are closely aligned to your wider people or wellbeing strategy. For example, if you have a strong environmental agenda, tax free bikes and electronic vehicles could be a good fit for this.
If you want to reduce the risk of burnout to employees, allowing employees to buy extra holiday days can support this and help generate substantial national insurance contribution savings for employers. While encouraging employees to opt into health screening and other health benefits may reduce the number of people taking sick leave, to save money on sickness absence, statutory sick pay and staff replacement costs also.
Similarly, if you want to focus on the financial wellbeing of your people, better communicating the tax savings for them can be helpful. As can promoting the option to top up pensions for employees as part of a policy to help individuals prepare for a positive retirement.
