With Rising Costs, How To Save Employer NIC with Salary Sacrifice ?

With the continued rise in employer National Insurance contributions (NIC), the pressure on UK businesses has rarely been higher. From wage inflation to increases in the national minimum wage, growing compliance obligations, and economic uncertainty, employers are expected to spend more — often without seeing a corresponding rise in revenue. In this environment, it’s crucial for employers to identify cost-saving strategies that are both legally compliant and supportive of their workforce. One area that may be worth exploring is salary sacrifice, which, if properly structured, can reduce an employer’s NIC burden while offering added value to employees.

Salary sacrifice arrangements involve employees voluntarily giving up part of their gross salary in return for non-cash benefits. This reduction in gross pay lowers the employer’s NIC liability. There are several types of salary sacrifice that might be available in the market — including pension contributions, electric vehicle leases, home electronics schemes, and cycle-to-work programmes. Not every option is suitable for every business or every employee, but in the right situations, some can deliver genuine savings.

Take electric vehicle salary sacrifice as an example. In a case where an employee earning £50,000 per year sacrifices £6,000 annually to lease an electric vehicle, the employer’s NIC bill is reduced from £6,900 to £6,072 — a direct saving of £828 per year. The employee also benefits: due to the low benefit-in-kind (BIK) tax rate of just 3% for electric vehicles, the tax on a £30,000 EV is only £180 annually. Compared to the cost of leasing the same vehicle privately with after-tax income (around £9,840 per year), the employee’s net cost drops to approximately £4,300 per year, a saving of more than £5,500. For both employer and employee, this is a mutually beneficial arrangement, provided it is properly structured and documented.

Another example is a home electronics salary sacrifice scheme. Suppose an employee earning £2,000 per month chooses to sacrifice £100 monthly for a year to obtain a household appliance. Their gross salary reduces to £1,900, and the employer’s NIC drops from £276 to £262.20 per month. That translates to an annual employer saving of £165.60. The employee may still be liable for tax on the benefit depending on how the scheme is structured, but some may find the affordability and spread payments valuable — especially if they lack credit access or savings.

It's important to emphasise that these arrangements must be carefully considered. Not all salary sacrifice schemes are tax-efficient for the employee, particularly if the benefit is fully taxable as a BIK. Employers must also ensure that the employee's pay does not fall below national minimum wage thresholds as a result of the arrangement.

Beyond salary sacrifice, there are other employer strategies that may help reduce overall employment costs:

• Flexible reward structuring: Combining low-tax fringe benefits (such as approved travel, health, or cycle schemes) with modest pay increases may help employers offer meaningful value to employees without incurring the full cost of higher gross salaries and NIC liabilities.
• Upskilling through subsidised training: Many Councils and regions offer partially or fully subsidised training programmes for staff. By investing in training rather than raising wages immediately, businesses can improve employee value and satisfaction while maintaining payroll costs at a manageable level.

· Government grants and funding support: Businesses may be eligible for regional or national government grants, innovation support, or capital funding for equipment, technology, or training. These can reduce the upfront investment burden and improve cash flow.

· Tax incentives and reliefs: Schemes such as R&D tax credits, capital allowances, or temporary tax reliefs can significantly reduce corporate tax bills, especially for companies investing in innovation, automation, or productivity improvements.

Each of these options requires tailored consideration. What works for one business may not be appropriate for another. Factors such as headcount, salary levels, industry sector, and existing benefit structures all play a role. That said, a combination of thoughtful planning and targeted implementation of these measures could help many employers reduce payroll costs without compromising employee wellbeing.

UK employers are facing tremendous financial strain. From NIC increases and wage expectations to minimum wage hikes, AI-driven disruption, and declining economic demand, the list of challenges is long. Yet businesses are still expected to remain competitive and retain their teams. In this climate, it is more important than ever to think creatively and legally about cost control. While no single solution will fix all issues, small gains — especially when applied across a workforce — can add up to substantial relief.

This article is intended solely for advisory and general informational purposes. These examples do not constitute tax planning advice or scheme promotion. Employers should assess the suitability and compliance implications of any measure before implementation. Independent professional advice and adherence to HMRC regulations are essential.

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