3 reasons to put a salary exchange scheme in place now
2024’s general election saw a landslide victory for Keir Starmer’s Labour Party, albeit with the lowest single-party vote share since the second world war. Four months later, Rachel Reeves took to the dispatch box.
The country was warned to expect a “painful” Autumn Budget of “tough choices”. In the event, it was the UK’s business owners who felt the impact of these decisions most forcibly.
A rise to employer National Insurance (NI) rates will come into effect from 6 April 2025.
One way to partially offset these rising expenses might be by adopting a salary exchange scheme. But the end of the tax year is looming, so if you’re contemplating making this change in your business, now is the time to act.
Keep reading to find out why.
Rachel Reeves announced changes to employer National Insurance rates and thresholds
Under current rules, employer National Insurance is paid at 13.8% above a threshold of £9,100 a year.
In a move that many experts had predicted, the chancellor used her Budget to increase the NI rate by 1.2%, to 15%, effective 6 April 2025.
At the same time, Reeves reduced the £9,100 threshold to just £5,000.
As a business owner, not only will you pay employer NI contributions at a higher rate, but you will start to pay earlier. The £5,000 threshold is due to remain in place until 6 April 2028. From then, it will increase annually in line with the Consumer Prices Index (CPI).
The reforms are expected to raise £25 billion a year by the end of 2029/30 but adopting a salary exchange scheme could mitigate some of its impact for you as a business owner.
3 important reasons to consider adopting a salary exchange scheme now
1. Changes are imminent so act now
The government’s changes to NI rates and thresholds will come into effect from April and in all likelihood they will increase your NI bill.
Switching to a salary exchange (or a “salary sacrifice”) scheme now will mean that you can mitigate the impact of these changes. At the same time, you’ll even increase your employees' take-home pay, with a knock-on for staff morale and wellbeing.
2. There are financial and non-financial benefits for you and your employees
When an employee opts for salary sacrifice they effectively lower their salary and this decreases the NI you pay too.
If an employee reduces their salary by £200 each month – by exchanging this for a pension contribution – that’s £200 you won’t need to pay 13.8% on. From April, you’ll be saving 15% on the exchanged amount.
When a salary exchange scheme is rolled out across the board, especially where take-up is high among your top earners, the savings can be huge.
Note: The above figures are extrapolated from calculations by The People’s Pension and are based on average employee salaries of £25,000, exchanging 5%.
What you do with the money you save is up to you.
You might opt to pay your NI savings into your employees’ pension as an added incentive to adopt the salary exchange scheme. This would also strengthen your employee benefits offering, helping you to retain existing staff and attract the best new talent.
Equally, you might pay the money back into the business, using it to develop and grow.
3. It’s easy to do… with expert help
Offering a salary exchange scheme, especially where staff take-up is high, can mean significant savings for your businesses. Setting up a scheme can be straightforward but will likely require expert help.
You’ll need to be sure it is the right option for you and your staff and implementation can be initially complex. You’ll need to:
Work closely with your company’s payroll department to put the changes in place
Ensure employee contracts are updated to reflect the changes
Be compliant, adhering to HMRC regulations around pay and recordkeeping.
Communication will also be key. You’ll want to clearly and concisely explain the pros and cons so that your staff can make informed choices.
We can help with all of this, so be sure to get in touch if you think a salary exchange scheme might be right for your business. And remember, with changes on the horizon, now is the perfect time to act.
Get in touch
Adopting salary exchange could make a significant financial difference to your business while increasing employees' take-home pay. With changes to employer NI rates imminent, now is the perfect time to get your scheme in place and we’re on hand to help. Please contact us to talk about what we can do for you.
Please note
This article is for general information only and does not constitute financial advice, which should be based on your individual circumstances.. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. Workplace pensions are regulated by The Pension Regulator.
However, it is important to note that salary sacrifice is not suitable for all employees. Employees’ pre-tax salary will be reduced. This may affect their entitlement to State Benefits.
Note that salary sacrifice arrangements should be appropriately documented with the employee signing an agreement letter unless it is written into the employment contract. In addition, you would need to ensure that your employee payslips can display the amount of the salary exchanged.
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested. Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal.