With employer National Insurance Contributions (NICs) rising from 13.8% to 15% from 6th April 2025, businesses are facing increased employment costs. One way to mitigate this impact is through Salary Exchange Schemes, which offer both employers and employees a tax-efficient way to structure earnings and benefits. With only a few months left, now is the time to assess whether Salary Exchange is right for your business.

What Is Salary Exchange? 

Salary Exchange (also known as Salary Sacrifice) allows employees to give up part of their gross salary in exchange for non-cash benefits such as pension contributions, Electric Vehicles (EV), and cycle-to-work schemes. Since these benefits are either tax-free or tax-efficient, both employees and employers can reduce their NIC tax while offering valuable perks. 

Currently, only 41% of SMEs (Small and midsize enterprises) in the UK offer Salary Exchange [1], despite its potential to cut costs and improve employee benefits. 

Offsetting the NIC Increase

For employers, Salary Exchange provides an effective way to reduce NIC tax, as lower gross salaries mean lower company NIC contributions. This can help offset the upcoming 2025 increase while also improving business cash flow, allowing companies to reinvest savings into areas like training, technology, or operational growth or even pass back the savings via enhanced employee benefits or increased pension contributions. In a competitive labour market, offering tax-efficient benefits can also enhance recruitment and retention, making businesses more attractive to prospective employees. Additionally, Salary Exchange supports corporate sustainability goals, as schemes like electric vehicle leasing and cycle-to-work programmes encourage greener commuting and reduce a company’s carbon footprint. 

Higher Take-Home Value 

Employees benefit from Salary Exchange through reduced income tax and NICs, increasing their net take-home pay while still receiving valuable benefits. It also provides access to cost-effective perks, such as affordable EV leasing, pension contributions, and childcare support, which might otherwise be expensive. By deducting payments before tax, Salary Exchange also simplifies budgeting and financial planning, particularly for large expenses like electric vehicles. However, employees should be aware of potential obstacles, such as ensuring their employee’s salary does not fall below the National Minimum Wage and how it may impact statutory benefits like sick pay and maternity leave. 

Considerations for Employers 

Employers should be aware of potential obstacles, such as ensuring their employee’s salary does not fall below the National Minimum Wage and how it may impact statutory benefits like sick pay and maternity leave. Communications also need to be drafted in line with HMRC regulations. Implementing Salary Exchange requires careful communication and planning. As it involves a contractual change, employees need clear information on how it works and the potential benefits. Employers must also ensure their payroll systems can accommodate Salary Exchange and comply with regulations. Tailoring Salary Exchange offerings to match employee needs—such as prioritising pension contributions, childcare support, or electric vehicle schemes—can help maximise engagement and participation. Additionally, businesses should stay informed on relevant legislative changes to ensure ongoing compliance and tax efficiency.  

One issue with Salary Exchange is that some higher-rate taxpayers may not claim their full tax relief entitlement. While this is the employee’s responsibility, they may require additional guidance to ensure they maximise available tax benefits. Employers should be aware of this potential gap and consider signposting employees to relevant resources or financial advice. 

Act Now 

With employer NICs rising in April 2025, Salary Exchange Schemes provide a proactive way to manage costs while enhancing employee benefits. By implementing a scheme before 5th April 2025, businesses can maximise tax savings and strengthen employee retention strategies. 

If you would like to discuss anything mentioned in this article, please contact us. 

More information on Salary Sacrifice can be found here.  

[1]https://www.spw.com/wealth-lens/how-you-could-benefit-from-salary-sacrifice-arrangements-with-your-employer  

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.

See the other topics in our Bitesize Tax Planning series:
Personal Reliefs
Planning for Retirement
Savings & Investments
Employee Benefits
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Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

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