At JVCA, we’re always on the lookout for ways to help business owners save tax, cut costs, and make smarter financial decisions (yes, we are just that proactive!). And today, we’ve got a big one – something that can benefit both you and your employees.
With the new government’s Employer’s National Insurance (NI) increase due in April, there’s never been a better time to take advantage of HMRC’s salary sacrifice (or salary exchange) rules – especially for pension contributions and electric vehicles.
This is a tax-saving opportunity that too many businesses are missing out on. So, let’s get into it.
What is salary sacrifice and how does it work?
Salary sacrifice is exactly what it sounds like – an employee agrees to give up (or “sacrifice”) part of their salary in exchange for a non-cash benefit.
For example:
- The employee reduces their salary by an agreed amount,
- Instead of receiving that money as salary (and paying tax and NI on it), the amount is paid into their pension by the employer, or;
- The employee gets an electric company car instead of that salary.
The result?
- The employee saves NI contributions on the sacrificed amount.
- The employer also saves NI contributions (which is about to get even more valuable!).
Why now?
From April 2025, employer’s NI contributions are increasing to 15% ( where as it is currently 13.8%). That means the savings from using salary sacrifice will only get bigger.
The savings in action
Let’s say you have an employee earning £28,000 per year who contributes £72.54 per month to their pension.
With salary sacrifice:
- The employee gets an extra £7.25 per month in their pay packet, thanks to the NI saving.
- The employer saves £10.88 per month (15%!).
- Over the course of a year, that’s £87 extra for the employee and £130.56 for the employer.
- Multiply that by the number of employees you have, and the savings really add up!
For larger businesses, this could mean thousands in savings each year.
| Want to know how much you could be saving? Email us at [email protected] and we can help you figure it out. |
What can salary sacrifice be used for?
While salary sacrifice can be used for various things, the two biggest and most effective options for most businesses are:
1. Pension contributions
This is where everyone wins (well, apart from the taxman!).
- The employee pays less tax and NI.
- The employer pays less NI.
- More money ends up in the employee’s pension pot.
- No additional cost to the business.
It’s a no-brainer for any business with employees.
2. Electric company cars
Salary sacrifice can also be used for company electric vehicles (EV), allowing employees to lease an EV at a far lower cost than if they bought one personally.
It works particularly well because electric cars currently attract very low Benefit-in-kind (BIK) tax rates – so the tax savings can be significant.
Interested in learning more about this for company cars? We’ve written more about it here: Salary swap for an EV car
Pitfalls to watch out for
Like all things tax-related, there are rules. Salary sacrifice is HMRC-approved, but you need to do it properly to avoid issues.
- It must be documented and signed – The employee and employer must have a written agreement confirming the salary sacrifice, and it must be structured correctly to meet HR and tax law requirements.
- It can’t take an employee below minimum wage – This means low earners won’t qualify for salary sacrifice. It’s only an option for those earning above the National Minimum Wage.
As with all HMRC processes, there are other criteria as well, but these are the two big ones.
Need help?
As your business’s (wannabe) accountant, we can:
- Provide the necessary documentation to set up salary sacrifice schemes correctly.
- Handle the payroll processing, so you don’t have to worry about the admin.
- Make sure you’re fully compliant with HMRC rules so you get the savings without the stress.
If you’re interested in setting up salary sacrifice for pensions or electric cars or just want to chat about how it could work for your business, let’s talk.
Email us at [email protected], and we’ll help you put together a tax-saving plan that works for you and your employees.
Because why pay more tax than you have to?
