How salary exchange can help offset the increase in National Insurance contribution rate for employers

Our pension expert, Justin Corliss, outlines what the increase in National Insurance (NI) contributions means for employers and how salary exchange could help lessen the impact. 

Changes announced in budget 

The budget on 30 October 2024 announced the rate of employer’s NI will increase from the current 13.8% above £9,100 per annum threshold to 15% above £5,000 with effect from 6 April 2025. 

What does this mean for employers? 

At first glance this would appear to create additional NI cost for all employers. However, the government are more than doubling the existing relief by increasing the Employment Allowance from £5,000 to £10,500 as well as removing the £100,000 threshold, expanding this to all eligible employers.  

This has two significant benefits. To begin with, it means employers won’t need to pay the first £10,500 of employer NI contributions for which they would otherwise have been liable. In addition, rather than this only being applicable to businesses where the total annual NI bill was below £100,000, it will now also be available to businesses with annual NI liabilities above this level. This will result in some employers paying less NI post April 2025, some paying the same and others seeing an increase.

Salary exchange can help lessen the blow 

Even with the expanded employment allowance, many employers will still see an increase in their overall NI bill, making pension contributions a more attractive form of remuneration, especially via salary exchange.  

Employers don’t pay NI on employee’s pension contributions and if you use salary exchange, there’s a contractual agreement to reduce an employee’s headline salary. This saves both employee and employer NI on the salary no longer paid to the employee. The employer then pays both their own, and the employee’s pension contribution, as an employer pension contribution. There are a few ways the employer pension contribution can be structured but it’s quite common for all the employee NI savings (from not being paid a portion of their salary) to be redirected into the pension plan, and some or all of the employer’s NI saving too.

What does salary exchange mean for employees? 

Increasing employees’ pension savings could help improve recruitment and retention. This may help shift the conversation with employees solely on headline salary to considering the total remuneration package. This is especially true if some of the employer NI saving is used to provide employee benefits, whether they be additional pension or some other form of benefit, such as group income or critical illness cover.

An alternative way to save

Alternatively, employers could retain these savings within the business to offset some of the cost of the increase in employer NI cost of the non-exchanged element of salary. It doesn’t need to be an all or nothing decision and employers could use a combination of options, perhaps passing a percentage of the employer NI savings on to the employee and retaining the remainder within the business.  Whichever option is used, paying pension contributions via salary exchange could mitigate some of the impact of the employer NI increase coming in April 2025. 

Points to consider

It’s important to note that salary exchange won’t be right for all your employees, and it isn’t possible to exchange salary below minimum wage, or below the threshold for automatic enrolment. It’s also important to remember that employee’s headline salary will be lower post exchange which could impact on their ability to borrow.

You should speak with your payroll provider prior to deciding on a particular structure for your salary exchange arrangement to ensure it can facilitate your plan. As it’s a change of contract of employment, you will likely need to take legal advice. This one-off cost may still be palatable given the ongoing benefits salary exchange can bring.

The employer NI increase will likely be a concern for employers, and some will incur additional costs as a result, but with focused planning, it is possible to mitigate the impact of some of this additional cost.