A pension tweak could save employers thousands in National Insurance
April brought a double blow for employers with rising wages and National Insurance (NI) costs, making employees more expensive than ever. However, a salary sacrifice pension scheme offers a smart way to cut business costs while boosting employee pensions.

Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest, the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.
2 May 2025
This article is not personal advice. If you are unsure of a course of action, please ask about advice.
April is always a busy month for payroll teams, but this year it’s delivered an extra sting in the tail for employers. The cost of having employees just surged, thanks to a double whammy of higher wages and increased National Insurance costs.
The numbers add up fast for businesses with large workforces, and growing businesses expanding their teams will feel the squeeze. And with Trump tariffs rearing their head again, company balance sheets are feeling the pressure from all sides.
On 1 April, the National Living Wage jumped from £11.44 to £12.21 an hour – a steep 6.7% rise, more than double the rate of inflation. While the increase is designed to help workers keep up with the cost of living, for businesses already battling tight margins, it’s another blow to their bottom line.
But that’s not all, from this month employers also face higher National Insurance costs. The rate of employer National Insurance has risen from 13.8% to 15%, and it now kicks in at earnings above £5,000 (down from £9,100) – meaning employers are paying higher rates of tax on a bigger portion of employee income. Businesses employing someone on average UK earnings of £37,430, will need to find an extra £955 a year.
The rising costs of employing staff will hit some businesses harder than others. However, there is one proven way to soften the NI hike: salary sacrifice. Also known as salary exchange, salary sacrifice lets employees give up part of their salary, usually in return for certain non-cash benefits, including contributions into pension schemes by their employer. The result is tax savings for both parties - the employee saves both the income tax and employee NI on what they sacrifice into their pension, and the business doesn’t have to hand over the 15% employer NI to the taxman on the portion of salary sacrificed. Tax rules can change, tax rates and bands differ for Scottish taxpayers and benefits depend on individual circumstances.
Salary sacrifice is the most tax-efficient way to contribute to a pension, offering employees enjoyable tax savings of 28-47% - and for those sacrificing income between £100,000 - £125,140, the effective savings soar to 62% (different rates apply for Scottish taxpayers). If an employee increases what they pay into their pension, the NI savings for businesses will grow. Pensions are designed to help fund retirement, so any money can’t usually be taken out until age 55 (rising to 57 in 2028).
Any savings made by the employer can be reinvested back into the business, or used to enhance employee pensions or wider benefits packages further. It could prove a very cost-effective way of boosting staff retention or way to control business costs at a difficult time.
Switching the pension to salary sacrifice is a savvy move – it saves money, enhances employee benefits, and supercharges employee pensions. For employers the savings will stack up quickly – and the bigger the workforce, the bigger the savings.
Company profile | 2024/25 Employer NI (13.8%) | 2025/26 Employer NI (15%) | Employer NI savings in 25/26 using salary sacrifice | Extra Employee NI (8% basic rate taxpayers) savings directed into each Employee's pension (average) |
---|---|---|---|---|
20 employees who all earn £35,000 a year | £71,484 | £90,000 (£18,516 extra) | £5,250 | £140 |
50 employees who all earn £27,500 a year | £126,960 | £168,750 (£41,790 extra) | £10,312 | £110 |
80 employees who all earn £50,000 a year | £451,536 | £540,000 (£88,464 extra) | £30,000 | £200 |
200 employees who all earn £40,000 a year | £852,840 | £1,050,000 (£197,160 extra) | £60,000 | £160 |
Please note, auto-enrolment minimums used in calculations, assuming 5% employee & 3% employer on full salary. None of the examples above reflect any employment allowance – employers may be able to claim which could reduce liability by up to £10,500.
Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest, the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.
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