National Insurance Hike 2025: Why Salary Sacrifice is a Smart Move

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

These changes, expected to raise £25 billion annually to support public services and economic stability, mean significantly higher payroll costs for many businesses. As a result, salary sacrifice has taken on renewed importance as an effective way to offset these rising costs while helping employees grow their pension savings. Here’s why now is the time to consider salary sacrifice – and how Penfold can help.

Changes to National Insurance in 2025

The 2024 Autumn Budget introduced the largest single increase in employer NI contributions in years. From April 2025, employers will see two key changes:

• The threshold on employee earnings at which NI applies will drop from £9,100 to £5,000
• The NI rate will increase from 13.8% to 15%

How the NI Increase Will Affect Employer Costs

For many businesses, these new NI requirements represent a big increase in costs. Employers will have to pay an additional £770 in NICs for each minimum wage worker, or an extra £900 for each employee on median earnings, adding up quickly for businesses with large workforces.

While small businesses will benefit from a doubled Employment Allowance, now £10,500, to shield them from some of these costs, larger companies will need to carefully balance these rising employment expenses with the need to remain competitive in the market.

Why Salary Sacrifice Is Key Amid Rising NI Costs

Salary sacrifice, also known as salary exchange, lets employees redirect a portion of their pre-tax salary to non-cash benefits, such as pensions. With this arrangement, employers save on NI contributions as the sacrificed portion is no longer subject to NI. This also reduces employees’ taxable salary, allowing them to save on NI contributions and potentially increase their pension savings.

With the upcoming NI increase, salary sacrifice provides a timely solution for businesses to manage increased NI costs while offering employees a tax-efficient way to grow their pensions.

How to Offset the NI Increase’s Impact on Business Costs

For employers impacted by NI increases, salary sacrifice has become an essential tool for cost-saving and can provide much-needed relief. By allowing employees to divert part of their salary into their workplace pension, employers reduce the salary on which they pay NI – an effective way to manage payroll costs while also demonstrating a commitment to employee financial wellbeing.

Salary sacrifice helps employees, too, as they can reduce their own NI contributions, potentially increasing their take-home pay or choosing to boost their pension contributions. Higher earners, in particular, may benefit as salary sacrifice can help them avoid moving into higher income tax bands.

How Penfold is Supporting Businesses Through NI Changes

At Penfold, our mission is to help everyone save enough to be comfortable in later life. That includes helping businesses navigate the complexities of tax-efficient workplace pension contributions in a way that benefits both employers and employees.

Our modern pension platform makes setting up and managing salary sacrifice pension contributions straightforward, saving businesses hours of processing time and reducing admin pain. We also integrate seamlessly with payroll systems, making compliance and cost savings easy to achieve.

Penfold are here to show you how easy it can be to use salary sacrifice pension contributions to your advantage. We can guide you through every step – whether it’s setting up a new Penfold salary sacrifice workplace pension or optimising your existing auto enrolment scheme.

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