Significant changes to National Insurance (NI) are imminent, bringing increased costs for businesses from April 2025. With higher NI contributions and a lower payment threshold, employers will face added financial pressure. Fiona Terry, Senior Employee Benefits Consultant at Thomas Carroll, explores how salary exchange can help reduce costs while boosting employees’ take-home pay.
The 6th of April 2025 should be known as National Insurance (NI) day, because it’s the day when employers’ contributions to NI will increase from 13.8% to 15%. It’s also the day that the threshold at which employers start paying NI drops from £9,100 to £5,000. It is estimated that the drop in threshold alone will cost the average business around £615 extra per employee.
For many businesses, this increase means their growth plans could be put on hold, possibly leading to redundancies. In addition, the national minimum wage is also increasing by 6.7%, so it’s evident that the next few months could be a financial challenge for employers.
Many businesses may be looking for ways to mitigate these increases. One way to do so could be via an employee benefit called a salary exchange scheme. Introducing salary exchange can be a positive step in helping employers offset some of this extra NI whilst uplifting the employee’s take home pay.
Pension salary exchange schemes have increased in popularity in recent years, with more businesses seeing the benefits for both the employer and employees. However, let’s be honest, dealing with tax and NI is the last thing on many employers’ minds. Outsourced accountants and tax experts tend to help with that – until a leap like this April’s comes along.
Partnering with outsourced employee benefits specialists, like our team at Thomas Carroll, can simplify the process. We guide you through the available options, conduct a comprehensive feasibility study to determine if a salary exchange scheme is right for your business, as there are both benefits and considerations in implementing this project, which we can fully support. On average, implementation takes around two months to complete.
We have created an online calculator to help business owners assess whether a scheme like this would benefit their company and their staff. With just a few clicks, they can see the potential savings available to them if they introduced a salary exchange.
So How Does It Work?
In essence, it is a mechanism in which an employee exchanges part of their gross salary for an additional employer pension contribution. As an employee’s gross salary is less, they pay less national insurance and so receive more in their annual take home pay packet, and the employer pays less NI contributions. It’s as simple as that, really – rather than a traditional pension contribution that is paid after income tax and NI has come out, you pay it before that – as a salary exchange- resulting in savings for both the employer and the employee.
For example, a business with 30 employees who are paid an average salary of £30,000 a year could save around £6,750 a year using salary exchange, while a business with 100 staff, again with an average salary of £30,000, could save around £22,500.
As an employer, there are some key advantages to implementing salary exchange:
- You are supporting your employees by helping them get a little bit extra in their take home pay
- You are supporting higher earners by reducing their administrative burden as they would get immediate high-rate tax relief without having to reclaim it via their self-assessment
- The employee’s base contribution remains the same
- You are reducing your own businesses NI contribution costs
We have seen a huge uptake in interest on salary exchange since the autumn 2024 budget, and as a business employing just under 200 employees at Thomas Carroll, we realise that these changes to NI and national minimum wage will have a ripple effect on the economy. In the short term, it may hinder economic growth, as employers may feel more cautious about making additional financial commitments.
By considering the implementation of salary exchange, this may reduce some of the wider financial burdens for employers in the coming months and employees would benefit from a small increase to their take home pay. In the current economic climate where we are all feeling a financial squeeze with increased cost of living, every penny counts.
Want to Learn More?
If you’d like to learn more about how salary exchange can benefit both your business and employees, contact us today. Call us on 02920 853788 or email us at contact@thomas-carroll.co.uk.
