According to the Institute for Fiscal Studies, if the employer national insurance contribution (NIC) rate jumps to 15% in April 2025 from 6. to 6., the cost to employ someone earning a median wage will rise by PS900 per year.
Salary exchange schemes, or salary sacrifice, will be increasingly popular in response. These allow employees to receive a portion of their salary as a non-cash reward.
These schemes can make employee benefits, from childcare vouchers to bikes, pensions, and holiday purchases, more affordable. They can also save employers thousands of pounds on National Insurance Contributions. It is crucial to the success of these schemes that they are communicated and optimized to employees.
Don’t limit the options to choose salary sacrifice schemes
Salary sacrifice schemes are usually opened once a calendar year for employees to sign up for non-cash benefits during an annual benefit period, at the time of their first employment or the beginning of a 12-month plan. This can make things easier for the person who administers the scheme but it could limit the number of employees that opt in, and the savings they are able to achieve.
Not all employees are ready to buy a new bicycle through a salary-sacrifice scheme at the beginning of an annual benefit window. Even though it might seem easier to track when a 12-month scheme will end, it could be better to offer such schemes all year.
Employee benefits software advances can help to avoid this being an ongoing administrative problem by automatically allowing employees to opt in to schemes. Connect with payroll and suppliers to make the right deductions, and then stop payment once the bike is purchased, for example.
Set salary sacrifice schemes as the default option
Salary sacrifice schemes also fail to achieve the maximum tax and national security savings because they leave it up to the employees to decide whether or not a core benefit such as pension contributions for their employees should be paid through salary sacrifice. It is important that employees understand the complexity of a pension scheme salary sacrifice, otherwise they may not opt in.
Making core benefits a mandatory option that employees can opt out of, instead of an optional salary-sacrifice scheme, would encourage more people to stay opted in.
If you want to let employees decide, use visual tools and calculators that will help them better understand what is available. By showing employees, for example, how much they could save on tax by making their pension into a salary-sacrifice scheme and how much their pension pot would increase if these savings were reinvested.
Use simple words to explain and educate
Some employees may feel worried by the words used to describe “sacrificing” some of their income. They might even think they are losing out. You can explain the’salary swap’ by referring to’salary exchange.’ This will help employees understand that they are exchanging a part of their salary for a valuable benefit.
Some of the rules governing salary sacrifice, or exchanges, are also confusing. Not all benefits result in the same savings, and taxpayers on the basic tax rate can save differently than those with higher rates. Also, those earning close to or below the minimum wage may not qualify.
It is worth using employee benefit software to explain to employees exactly what they qualify for and how much they can save. Segmented campaigns are also a great way to target different tax rates with different benefits.
Integrate your people strategy with salary sacrifice
A good way to maximise take-up is to align your salary sacrifice plans with your overall people or wellness strategy. If you are a firm believer in the importance of environmental issues, then tax-free bikes and electronic vehicles may be an excellent fit.
Allowing employees to purchase extra holidays can help reduce burnout and save employers a lot of money on national insurance contributions. Encourage employees to take advantage of health screenings and other benefits to reduce sick leave.
If you are interested in the financial well-being of your employees, it can be beneficial to better communicate the tax savings they will receive. Promoting the option of topping up employees’ pensions as part a policy that helps individuals prepare for a successful retirement can be helpful.
