Navigating NICs: Leveraging Pension Contributions from 6 April 2025

On 6 April 2025, significant changes to National Insurance Contributions (NICs) come into effect, impacting employers across the UK. 

These changes include a reduction in the Secondary Threshold from £9,100 to £5,000 per year and an increase in the secondary Class 1 NIC rate from 13.8% to 15%. As a result, employers will face higher NIC liabilities, increasing the cost of employing staff. 

Salary sacrifice arrangements, or salary exchange arrangements as they are often known, (particularly involving employees’ increased pension contributions) can present a strategy for employers to mitigate these increased costs.

Leveraging Salary Sacrifice via Pension Contributions 

By allowing employees to reduce their pre-tax salary (and consequently, the employer's NIC liability) in exchange for non-cash benefits such as pension contributions, salary sacrifice arrangements can be mutually beneficial for employers and employees. 

Where, for example, an employee agrees to, say, a £5,000 reduction of their annual salary in exchange for increased pension contributions, the employer's NIC liability on that amount is eliminated. For employers with a large workforce, this arrangement can make for significant annual NIC savings.  Because the pension contributions are made from gross salary, the employee may also benefit from an NI saving.  There can be other benefits for employees as well (such as where the sacrifice reduces adjusted net income below £100,000, allowing the employee to retain their full personal allowance).

Key Issues for Arranging Salary Sacrifice 

Contract amendment: To implement a salary sacrifice arrangement, employers must amend the terms of their employees' contracts to reflect the new salary and non-cash benefits. Significantly, employers must ensure that the arrangement does not reduce the employee's cash earnings below the National Minimum Wage rates. Specialist advice may be needed (including to ensure compliance with HMRC’s requirements for an effective contract amendment).

Communication: Employers should also communicate the benefits and implications of salary sacrifice to their employees, ensuring they understand how it affects their take-home pay and overall compensation.  There can be negative implications, for example because the employee’s gross salary is reduced, which can impact mortgage applications and maternity pay. Employers will need to consider how to address this.

Pension scheme documentation: The governing documentation of the pension scheme must be reviewed to check whether any amendments are required to, for example, the definition of ‘pensionable salary’ if it is intended that the figure used for calculating member benefits (including those payable on death) is the notional “pre sacrifice” salary. Accompanying pension scheme literature and member communications will similarly need to be reviewed and updated to reflect the new salary sacrifice arrangement.

Conclusion

The changes to NICs effective from 6 April 2025 present a significant change for employers. However, by leveraging salary sacrifice arrangements using pension contributions, employers can mitigate this impact. 

If you would like advice on any of the issues raised in this article, please reach out to your usual Burges Salmon contact.

This article was written by Crispin Freeman and Charlotte Cocker, with thanks to James Green for his helpful comments