May 14
The rise in employer National Insurance contributions from April 2025 has pushed salary sacrifice pension arrangements to the top of the agenda for many businesses. With the employer NIC rate now at 15% and the secondary threshold set at £5,000 per year, the cost of employing people has increased significantly.
For employers running salary sacrifice pension schemes, the NIC savings these arrangements produce remain valuable. However, the rules are changing again. From 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each tax year will remain exempt from National Insurance contributions. Contributions above that limit will be subject to both employee and employer NICs.
That means now is the right time to review your scheme, check your documentation and understand how the new cap could affect both your business and your employees.
If you are not sure whether your salary sacrifice arrangement is still working as it should, talking to experienced accountants ireland who understand both UK and Irish employer obligations is a good place to start.
A salary sacrifice arrangement is an agreement between an employer and an employee where the employee gives up part of their gross salary in exchange for a non-cash benefit. In this case, the benefit is an employer pension contribution.
Because the payment is made as an employer pension contribution rather than ordinary salary, neither the employer nor the employee currently pays National Insurance on the amount sacrificed. The employee can also benefit from income tax efficiency because their taxable pay is reduced, although the exact position depends on the pension arrangement and their wider circumstances.
For the employer, every £1 that goes through salary sacrifice rather than direct salary currently avoids employer NIC at 15%. For an employee sacrificing £200 per month into their pension, that saves the employer £30 per month in NIC, or £360 per year, before the 2029 cap applies. Across a workforce of 30 people, that could mean £10,800 in annual employer NIC savings.
From April 2029, that same employee sacrificing £2,400 per year would only receive NIC relief on the first £2,000. The remaining £400 would be subject to employee and employer NICs. Income tax relief on pension contributions will continue to apply, subject to the usual pension tax rules.
The logic is straightforward, but the administration needs to be correct. HMRC has specific requirements about how salary sacrifice arrangements must be structured, documented and communicated to employees. If yours does not meet those requirements, the NIC savings you think you are making may not be legitimate.
For those interested in how digital tools are changing the way these arrangements are administered, our piece on Making Tax Digital for UK and Irish businesses is worth a read, as is our article on how AI is reshaping the accountancy profession.
The Autumn 2024 Budget introduced the most significant employer NIC changes for many businesses in years. From April 2025:
These changes affect employers across the UK. The combination of a higher rate and a lower threshold means that the total employer NIC bill for many businesses has increased materially, even before factoring in pay rises.
For small businesses with modest payrolls, the Employment Allowance provides important relief. However, it does not remove the need to review employment costs properly, particularly where you have a growing team.
This is one reason salary sacrifice pension contributions have come back into focus as a way of managing employer NIC costs more effectively.
Our article on how tax accountants help small businesses covers the broader picture of how businesses can respond to rising employment costs, and our SME business solutions team works with employers across the UK and Ireland on exactly these challenges.
| NIC Metric | Pre-April 2025 | From April 2025 |
|---|---|---|
| Employer NIC rate | 13.8% | 15% |
| Secondary threshold per year | £9,100 | £5,000 |
| Employment Allowance | £5,000 | £10,500 |
| NIC saving per £1,000 salary sacrifice | £138 | £150 |
| Estimated NIC saving per employee on £200 per month sacrifice | £331 per year | £360 per year |
| Example employer NIC bill for 30 staff on £30,000 average salary, before Employment Allowance | Approx. £86,500 | Approx. £112,500 |
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The figures above are illustrative estimates. Your actual position will depend on your payroll structure, employee earnings, pension contribution levels and whether you qualify for Employment Allowance or other reliefs.
From 6 April 2029, the National Insurance treatment of pension salary sacrifice will change. Only the first £2,000 of employee pension contributions made through salary sacrifice each tax year will remain exempt from NICs.
Any salary sacrificed for pension contributions above £2,000 will be subject to employee and employer Class 1 National Insurance contributions.
This does not mean salary sacrifice pension schemes are ending. Employers will still be able to operate them, and employees will still be able to contribute more than £2,000 through salary sacrifice. The difference is that the NIC advantage will be capped.
A few key points matter:
For employers, the practical issue is modelling the impact before the cap starts. A scheme that currently delivers a strong employer NIC saving may still be valuable after April 2029, but the saving may be lower for employees who sacrifice more than £2,000 per year.
The fact that salary sacrifice remains valuable is a reason to use it well, not a reason to assume everything is in order. There are several areas where existing salary sacrifice arrangements commonly fall short of HMRC’s requirements.
A salary sacrifice arrangement must involve a genuine change to the employee’s contractual entitlement to cash pay. You cannot operate it informally or on a handshake basis.
The employee’s contract, salary sacrifice agreement or variation letter should clearly show the reduced cash salary and the employer pension contribution arrangement. The employee must agree to the change before it takes effect.
HMRC expects employers to be able to demonstrate that the arrangement is clear, prospective and properly communicated. Employees should understand what they are giving up, what they receive in return, and how the arrangement may affect statutory payments, mortgage applications, pension calculations or other earnings-related benefits.
If your documentation is out of date or incomplete, that is a risk.
Salary sacrifice cannot reduce an employee’s cash pay below the National Minimum Wage or National Living Wage. This is a key compliance point for lower-paid employees, part-time staff and workers whose hours vary.
You need a payroll process that checks pay in each pay reference period. It is not enough to assume the annual salary looks safe.
Not all pension arrangements are set up in the same way. Your pension provider and payroll software need to handle salary sacrifice correctly, with the sacrificed amount treated as an employer pension contribution.
If your pension scheme still records the sacrificed amount as an employee contribution, the payroll and tax treatment may be wrong.
Every 3 years, employers must assess and re-enrol eligible employees into a workplace pension where required. Re-enrolment can sometimes disturb salary sacrifice arrangements if payroll or pension settings are reset incorrectly.
A re-enrolment review is a useful time to check that employees are still being treated correctly.
For businesses with cross-border payroll arrangements across the UK and Ireland, there is the added complexity of ensuring that UK salary sacrifice planning does not conflict with Irish payroll, PRSI, USC or pension rules. Our team of cross-border tax advisors can help you navigate this.
For a broader look at cross-border tax obligations, our articles on VAT compliance for businesses operating across the UK-Ireland border and UK tax rules for individuals with income in multiple countries cover related ground that is useful for employers managing teams in both jurisdictions.
Here is a practical checklist of what to review:
If you use digital bookkeeping tools connected to your payroll, it is worth confirming that the salary sacrifice amount is being correctly reflected in the payroll records and not just in the pension platform.
Our tax compliance team can carry out a review of your salary sacrifice arrangements and identify any gaps before they become a problem. For context on what a formal compliance review involves, our article on external audit expectations gives a useful overview of how thorough review processes work.
The new cap means employers need to rethink the way they explain, model and administer pension salary sacrifice.
Until 5 April 2029, pension salary sacrifice can still provide full NIC savings where it is properly structured and does not breach National Minimum Wage rules. From 6 April 2029, the NIC saving will be limited to the first £2,000 of employee pension contributions made through salary sacrifice each tax year.
For example:
| Annual Salary Sacrificed Into Pension | Employer NIC Saving Before April 2029 | Employer NIC Saving From April 2029 |
|---|---|---|
| £1,200 | £180 | £180 |
| £2,000 | £300 | £300 |
| £2,400 | £360 | £300 |
| £5,000 | £750 | £300 |
These examples assume a 15% employer NIC rate and do not account for employee NIC, tax relief, pension annual allowance issues or wider payroll effects.
The key point is that employees sacrificing more than £2,000 per year will see the NIC treatment change. Employers will also lose the employer NIC saving on the excess above £2,000.
This is also relevant to specialist tax planning more broadly. Businesses that have a clear strategy for managing employer NIC, pension contributions, R&D relief and capital allowances tend to be better positioned when rules change. Our article on capital allowances and how they reduce your tax bill covers one part of that picture, and our guide on R&D tax credits in the UK and Ireland covers another.
For business owners and directors, salary sacrifice pension contributions interact with wider questions of how you structure remuneration. The most tax-efficient approach often involves a combination of salary, dividends and pension contributions, and getting the balance right requires looking at the full picture.
Our articles on self-assessment tax returns for the self-employed and the future of financial planning and why integration is key cover some of this territory.
For family-owned businesses in particular, the interaction between salary sacrifice, profit extraction, pensions and succession planning is worth reviewing carefully. Our piece on protecting the family business with a family charter is a useful read if these considerations apply to you.
Businesses considering a sale or seeking investment may also find that pension and payroll arrangements affect how buyers or investors view the business. Our articles on how to prepare your business for sale and how a quality external audit strengthens trust with lenders and investors are relevant here.
Our corporate finance team works with business owners at every stage, from structuring remuneration to preparing for transactions, and can help you understand how your pension arrangements fit into the broader picture.
In some cases, businesses that have been running underfunded or poorly structured salary sacrifice arrangements find that the issue is part of a wider pattern of financial management concerns. If cash flow is tight, pension contributions are sometimes the first thing to slip, either in value or in administrative accuracy.
If your business is under financial pressure and you are trying to understand your full employer obligations, our corporate restructuring accountants team can help you look at the overall position and put a sustainable plan in place. You can also read more about how recovery accountants improve cash flow and what an insolvency accountant does in business distress cases if you need broader support.
Where there are concerns about whether pension funds have been correctly handled, the involvement of a chartered forensic accountant may be needed to establish exactly what has happened and provide a clear documented record. Our articles on red flags of financial fraud in SMEs and how forensic accounting helps in fraud investigations cover when that kind of specialist input becomes necessary.
NIC rules and salary sacrifice guidance are not static. HMRC updates employer guidance regularly, and the 2029 cap will require further payroll reporting detail before it comes into force. Keeping up with changes through our news and insights section is one way to stay on top of developments, and our resources section has tools and guides specifically for employers.
For businesses thinking about expansion, either into the UK from Ireland or from the UK into Ireland, our article on setting up a company in both the UK and Ireland covers the key decisions you need to make on payroll and pensions at the outset.
For those with employees based overseas or with income across multiple countries, our article on tax planning for UK businesses expanding overseas is a useful read alongside your salary sacrifice review.
If you are interested in understanding how due diligence applies to pension and payroll arrangements during a business acquisition, our piece on this topic covers exactly that.
For an understanding of what a well-run internal audit function can do to catch payroll and pension compliance issues before they escalate, our service page sets out how we approach this.
Our about us page gives more background on how SCC Chartered Accountants works and the cross-border expertise our team brings to employer compliance questions across the UK and Ireland.
Yes. A salary sacrifice arrangement requires a genuine change to the employee’s contractual entitlement to cash pay. The employee must agree to the change, and the contract or variation letter should clearly show the reduced cash salary and the corresponding employer pension contribution.
Most employees can, but there are important restrictions. Salary sacrifice must not reduce cash pay below the National Minimum Wage or National Living Wage. This is a practical issue for lower-paid staff, part-time employees and workers with variable hours. Eligibility should be checked before employees are enrolled.
It can. Salary sacrifice reduces contractual cash salary, and some lenders may use the lower salary figure for affordability assessments. Some employers provide confirmation of pre-sacrifice or notional salary, but employees should be told about this possible effect before joining the scheme.
Before the 2029 cap applies, every £1,000 of salary sacrificed into a pension saves the employer £150 in NIC at the 15% employer rate. From 6 April 2029, the NIC saving will only apply to the first £2,000 of employee pension contributions made through salary sacrifice each tax year.
If HMRC decides your arrangement does not meet the requirements, they may treat the sacrificed amount as ordinary earnings and seek unpaid tax or NIC, plus interest and potentially penalties. Getting the structure, documentation and payroll treatment right from the outset is far cheaper than dealing with a retrospective challenge.
Yes. An annual review is sensible, especially at the start of the tax year, after re-enrolment, after any payroll software change, or before major pension contribution changes. From now on, employers should also model the effect of the April 2029 £2,000 NIC cap.
Employees can opt out, but the terms for doing so should be set out clearly in the scheme documentation. HMRC does not allow employees to switch freely between cash salary and non-cash benefits whenever they like if the tax and NIC advantages are to apply. The arrangement should specify when changes are permitted and what counts as a valid lifestyle event.
No. Salary sacrifice can still be useful, especially for employees sacrificing £2,000 or less per year and for employers wanting a structured pension benefit. However, the NIC saving will be lower for employees sacrificing more than £2,000 per year after 6 April 2029, so employers should review the scheme and communicate clearly with staff.
Salary sacrifice is still one of the most practical ways to manage employer NIC costs, but only if it is structured and maintained correctly. With employer NIC at 15% and the new pension salary sacrifice cap due from April 2029, the stakes of getting it wrong, or failing to plan ahead, are higher than before.
Our team of accountants ireland and across the UK works with employers to review, correct and optimise salary sacrifice arrangements so they deliver the maximum compliant saving. We also help businesses understand how salary sacrifice fits into the wider picture of payroll management, tax planning and business structure.
To speak with one of our advisors about your current salary sacrifice arrangement or employer NIC position, get in touch with us today. We have offices in Armagh, Moy, Cookstown, Dundalk and London, and we will give you a clear picture of where you stand and what you can do about it.
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