Salary Sacrifice: The Smart Strategy to Reduce Costs in 2025

Are you feeling the pinch? 

If you run a small or medium-sized business, you’re probably feeling it more than ever. 

The cost of keeping your business running is rising fast, and recent tax and National Insurance changes are making things even worse. You’re now expected to pay more just to keep your workforce, squeezing your margins and leaving less room for growth.

But what if there was a way to reduce some of these costs while still supporting and rewarding your team? That’s where salary sacrifice comes in - a practical, strategic approach that allows you to reduce costs and invest in your employees.

But first, let’s look at the recent changes in more detail.  

The Squeeze on SMEs

2024 brought some significant changes to National Insurance and tax policies that have left SMEs feeling the heat. 

1. Employer National Insurance Contributions Increase

The rate for employer National Insurance contributions is set to rise from 13.8% to 15% in April this year. This increase will directly impact payroll costs, making it more expensive to employ staff. For SMEs already operating on tight budgets, this rise could lead to difficult decisions, such as scaling back recruitment, reducing other investments, or reallocating resources to cover these additional costs.

2. Reduction in Secondary Threshold

The threshold at which employers start paying National Insurance contributions will decrease from £9,100 to £5,000 per annum, also effective from April this year. This is bad news for SMEs because it means businesses will start paying National Insurance on a larger portion of their payroll, increasing costs significantly. For many SMEs, this could tighten already stretched budgets and make it harder to invest in growth or employee benefits. 

3. Corporation Tax

Corporation tax has remained at 25% for profits over £250,000 (19% before April 2023) continuing to impact SMEs. For smaller profits, the tapered rates still mean higher tax bills. For businesses juggling tight budgets, these changes make it harder to remain competitive. But, this is where salary sacrifice can help. What Is Salary Sacrifice?Salary sacrifice is a way of restructuring employee pay to reduce both your business costs and the tax burdens on employees. Here’s how it works:

• An employee agrees to give up a portion of their gross salary.
• In exchange, they receive a non-cash benefit, like pension contributions, cycle-to-work schemes, or electric vehicle leasing.
• Because the sacrifice reduces their gross pay, both employer and employee pay less in National Insurance and tax.

For example, an employee earning £30,000 sacrifices £2,000 annually for extra pension contributions. They save on National Insurance and tax (as their salary is lower), and as an employer, you save on your National Insurance contributions for the reduced salary. Over a year, that could mean hundreds of pounds in savings per employee. Employers can save 15% on National Insurance contributions for the amount of salary sacrificed by employees starting April 2025. For instance, if an employee sacrifices £10,000 of their salary for benefits, the employer saves £1,500 in National Insurance contributions.