Reducing Employer National Insurance Costs - Offering Benefits-in-Kind and Salary Sacrifice
With the recent changes to National Insurance Contributions announced in the 2024 Autumn Budget, UK employers are facing an increased financial burden.
The increase in Employer National Insurance contributions to 15% means that companies will now pay a higher percentage on each employee’s salary above the National Insurance threshold. This increase affects all businesses, making NICs one of the most significant payroll costs for employers.
Additionally, the reduced allowance—from £9,100 to £5,000—means that many employers will have less room to offset these NIC costs. This change is particularly impactful for small businesses, as it leaves them with a larger NIC burden despite relatively smaller payroll budgets. To avoid these increased costs cutting into profitability, companies may need to consider alternative strategies.
One effective way to offset these rising costs is by offering benefits-in-kind (BIK) and salary sacrifice schemes as part of employee compensation packages. BIKs and salary sacrifice schemes can provide savings on NICs, create a more attractive workplace, and improve employee satisfaction.
Benefits-in-Kind: A Cost-Effective Alternative
Benefits-in-kind, or non-cash benefits, are perks offered to employees that fall outside of standard salary payments. Examples include health insurance, gym memberships, company cars, and retraining courses. When structured effectively, certain BIKs are exempt from National Insurance contributions, or subject to lower NIC rates compared to regular salary payments.
BIKs are taxed differently from standard wages. While they are still subject to tax in many cases, certain types are either exempt from tax and NICs or are taxed at a lower rate, which can significantly reduce the employer’s overall National Insurance costs.
Salary Sacrifice: An Increase in Pensions Contributions
Implementing a salary sacrifice scheme can provide employers with substantial advantages, both financially and in terms of employee satisfaction. Through this arrangement, employees agree to "sacrifice" a portion of their pre-tax salary in exchange for non-cash benefits, such as pension contributions.
One key benefit of salary sacrifice schemes for employers is the reduction in National Insurance contributions. Since a portion of employees' income is redirected towards benefits, the company's liability for National Insurance is correspondingly reduced, leading to overall savings on payroll costs.
Furthermore, salary sacrifice schemes can improve an employer’s reputation and attractiveness to new talent. As employees increasingly look for companies that offer holistic benefits packages, providing personalised salary sacrifice options can make a workplace more appealing. This approach helps businesses not only retain skilled employees but also attract top candidates who value organisations that consider their financial and personal well-being.
Implementing Benefits-in-Kind and Salary Sacrifice Schemes to Optimise Savings
- Identify Suitable Schemes
The first step in effectively using these schemes to reduce NICs is identifying the right perks. Health insurance, gym memberships, and professional development are popular and often NIC-exempt. Working with tax specialists to understand which schemes best suit the workforce while providing NIC efficiency can maximise savings.
- Structure for Maximum Impact
Once the right benefits are selected, employers should structure these offerings to ensure maximum tax efficiency. For instance, these schemes allow employees to exchange part of their salary for benefits like pension contributions or electric vehicle leases. This structure can reduce both employee and employer NIC liabilities, as the salary sacrificed is may not subject to NICs.
- Communicate the Value to Employees
Effective communication is key to ensuring employees understand and appreciate the value. Educating employees about the tax savings and advantages of these benefits can increase uptake and employee satisfaction. For example, explaining how a health insurance plan offers access to private medical care and reduced waiting times compared to the NHS whilst also providing a tax-efficient benefit.
Not all employees may want or can afford increased pension contributions, but targeted guidance can help employees understand the long-term value of pension contributions and other benefits, potentially increasing participation and satisfaction.
Navigating Potential Pitfalls
While benefits-in-kind (BIKs) and salary sacrifice schemes offer clear advantages, employers and employees should be mindful of potential downsides, including the risk of reducing an employee's entitlements under life insurance policies. In some cases, opting for salary sacrifice schemes may lower an employee's notional pay, which can decrease the amount of life insurance coverage they're entitled to. Additionally, these schemes bring administrative complexity: BIKs must be correctly reported on P11D forms, and misclassification can lead to unexpected tax liabilities. Partnering with payroll and tax specialists can help ensure BIKs are managed accurately and comply with HMRC requirements.
Strategic Response to Rising NIC Costs
Amid rising National Insurance contributions, adopting salary sacrifice schemes and a benefits-in-kind approach allows employers to manage costs while offering meaningful perks to employees. Through careful structuring, companies can reduce NIC liabilities, improve employee satisfaction, and align with corporate goals. In an environment where profitability is increasingly impacted by tax policies these schemes represent a practical and sustainable strategy for employers to navigate the evolving fiscal landscape.
At Friend Partnership we specialise in designing and managing benefits-in-kind and salary sacrifice schemes tailored to meet the needs of bother employers and employees. Our expert team ensures these programs are compliant, cost effective, and seamlessly integrated into your payroll systems, allowing you to focus on what matters most – growing your business. Get in touch with is today by calling us on 0121 633 2000 or alternatively e-mail us at enquiries@friendpartnership.com.
Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK
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