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National insurance contributions are increasing to 15% in April. So how can small businesses manage this cost while still supporting their employees? Today, we're talking about salary sacrifice schemes, a smart way to reduce employer costs and give employees more in their pocket without increasing salaries. Why this matters? With national insurance contributions rising, many small businesses are facing yet another financial hurdle. Higher payroll costs can put pressure on already tight budgets, making it hard to retain staff and remain competitive. Business owners need cost-saving strategies that don't compromise employee well-being. This is where salary sacrifice schemes come in, allowing businesses to reduce their national insurance bill while giving employees valuable perks that enhance job satisfaction and boost take-home pay perks that enhance job satisfaction and boost take-home pay. So what do you expect to hear? In this episode, we're going to cover what salary sacrifice is and how it works, how it helps businesses offset rising national insurance costs, the pros and cons of implementing a scheme. I'll give you some real-life examples of businesses using salary sacrifice successfully. And, finally, actionable steps to reduce salary sacrifice in your business. If you're looking for a practical, legally compliant way to reduce costs while supporting your employees, this episode is for you. Stay tuned as we explore why salary sacrifice may be the key to balancing your business finances in 2025.

Speaker 1: 2:21

Okay, so let's get into it. What is salary sacrifice? Salary sacrifice is a legally approved agreement between an employer and an employee, where the employee agrees to give up a proportion of their salary in exchange for a non-cash benefit. This arrangement reduces the employee's taxable income, meaning both the employer and the employee pay less in national insurance and tax. It's a cost-effective way for businesses to provide additional benefits while saving money. For small businesses, salary sacrifice can be a valuable tool not just to offset rising national insurance costs, but also to enhance employee perks without increasing salaries. The key is choosing benefits that align with both business objectives and employee needs. Some of the most common salary sacrifice benefits includes pension contributions, the most popular and tax efficient option. Helping employees save for retirement while reducing national insurance costs for retirement while reducing national insurance costs. Cycle to work schemes enables employees to get a bike and equipment tax-free, promoting health and sustainability. Electric vehicle or EV salary sacrifice a growing trend that allows employees to lease an electric car through salary deductions, benefiting from significant tax savings. And childcare vouchers for those still available for employees who joined the schemes before 2018.

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Salary sacrifice isn't a one-size-fits-all solution, but when implemented correctly, it can help businesses save money while improving employee financial well-being. If you want a full list of all the available salary sacrifice schemes, we've put together a detailed blog covering everything you need to know. So just head over to the website, to our blog, and read the full guide. So I can hear you saying how does salary sacrifice health offset the national insurance increase? Well, the upcoming national insurance increase to 15% in April 2025 is causing concern for many small business owners.

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Rising payroll costs mean higher financial pressures, particularly for businesses operating on tight margins. Many employers are already navigating increased costs of material, energy and supply chain issues, making the additional burden of national insurance a significant challenge. For small businesses, payroll is often the largest expense and a 1% increase in employer national insurance contributions can add thousands to annual employment costs. This leaves many business owners questioning how they can balance their rising costs without cutting jobs or reducing employee benefits. Salary sacrifice schemes offer a practical and compliant way to manage this issue, providing savings for both the business and its employees. So how does salary sacrifice reduce national insurance costs? At its core, salary sacrifice lowers an employee's taxable salary, which in turn, reduces the amount of national insurance that both the employer and employee have to pay. So here's how it works you lower the gross salary, which then equals lower national insurance contributions. National insurance is calculated as a percentage of an employee's gross pay. If an employee agrees to reduce their taxable salary in exchange for a benefit such as a higher pension contribution or an electric vehicle lease, the employer's national insurance liability decreases. Employers can save and reinvest. The reduction in employer national insurance contributions can free up cash which can be used to offset the impact of rising payroll costs, invest in additional employee benefits to boost retention or support business growth initiatives such as hiring new staff or investing in new technology. In a time where small businesses are feeling the squeeze, this method allows them to stay competitive while managing costs strategically. So the employee benefits of a salary sacrifice scheme.

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One of the best aspects of salary sacrifice is that it's not just a cost saving tool for employers. It also benefits employees financially. Many employees are struggling with the cost of living, so salary sacrifice can help them maximise their earnings without needing a direct pay increase. More take-home pay. Employees who participate in salary sacrifice pay less tax and national insurance, meaning they will keep more of their earnings each month. This can be a welcome relief when employees dealing with rising mortgage rates, energy bills and everyday expenses, increased pension contributions and long-term wealth Pension.

Speaker 1: 8:07

Salary sacrifice is one of the most tax-efficient ways to save for the future. Employees can contribute more to their pension without reducing their net pay significantly. Over time, this can result in higher retirement savings, without the employee feeling the final financial pinch, and access to valuable benefits. Salary sacrifice can make high value benefits more affordable for employees. For example, an employee who couldn't normally afford an electric vehicle can access one at a reduced cost through an EV. Salary sacrifice. Employees can also save on cycling equipment, child care and much more.

Speaker 1: 8:50

In many cases, employees may not even be aware that these schemes exist. A well-structured salary sacrifice programme can prove financial wellbeing, employee satisfaction and retention, all while helping small businesses offset the rising costs of NIC costs. By embracing salary sacrifice now, businesses can proactively manage their payroll expenses before April 2025 increase takes effect, ensuring they remain financially stable and competitive in the long term. Here are some example scenarios for small businesses. So salary sacrifice schemes are not just theoretical solutions. They are actively helping small businesses across various industries save money while giving employees valuable perks. Let's take a closer look at some realistic solutions where businesses have successfully used salary sacrifice to manage costs and improve employee benefit. So let's look at pension salary sacrifice for a small business. So the challenge A marketing agency that we work with had 10 employees is feeling the financial strain of rising costs, especially with the upcoming national insurance increase to 15% in April 2025.

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The business owner wants to avoid salary increases, as payroll is already their largest expense, but they also don't want employees to feel financially neglected. So the solution After speaking with an HR consultant like us at KUHR, they decided to implement a pension salary sacrifice scheme. Here is how it works Employees agree to reduce their gross salary slightly, with the difference being contributed directly to their pension. As a result, the employer pays less national insurance contributions, saving an estimated three and a half thousand pounds per year across all employees. The business reinvests part of the savings into an employee well-being programme, boosting staff retention and engagement. The benefits to the employees Well, employees pay less tax and national insurance, meaning their take-home pay isn't significantly affected. Over time, their pension grows more quickly, setting them up for better financial security in the future. And employees feel valued because their employer is investing in their long-term financial well-being. Despite not offering direct salary increases, by introducing pension salary sacrifice. This small business saved thousands in employer national insurance contributions while helping employees secure their future A win-win strategy that small businesses should seriously consider.

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Okay, let's look at electric vehicle salary sacrifice for a small business. A retail company with 25 employees wants to offer competitive benefits to attract and retain staff, but they can't afford big salary hikes. They're also looking for ways to promote sustainability and reduce their company's carbon footprint. So the salary sacrifice solution they decide to introduce an electric vehicle salary sacrifice scheme. Here's how it works Employees lease an electric vehicle through salary sacrifice, reducing their taxable income. This means both employees and employer save on national insurance contributions. The company saves over £6,000 per year in national insurance payments, which can be reinvested into staff training, for example. The business can also market itself as an environmentally friendly employer, which helps with brand reputation and employee recruitment. The employee benefits Employees can drive a brand new electric car at a fraction of the cost. Thanks to the tax and national insurance savings, they don't need to pay a hefty deposit or take out a high interest personal lease. They reduce their carbon footprint, aligning with personal and corporate sustainability goals. The result Employees enjoy affordable access to electric vehicles, while the employer saves money and strengthens its sustainability credentials a huge win in today's eco-conscious market.

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And finally, let's look at cycle to work schemes for a growing business. A tech startup with 15 employees is based in a big, busy city centre where commuting costs are high. Some employees are struggling with rising travel costs and the business owner is looking for ways to help their team save money without increasing salaries. They introduce a cycle to work salary sacrifice scheme which allows employees to purchase bikes and cycling equipment tax-free. Here's how it works Employees sacrifice a small portion of their salary in return for a bike and accessories. Their taxable income is reduced, meaning both the business and employees save on NI contributions. The employer saves around £2,000 per year on national insurance payments. However, just a word of warning the employer must initially fund the bike purchase, essentially giving the employee an interest-free loan to be repaid over a maximum of 12 months. The employee benefits Employees get brand new bikes at up to 40% off retail price. They save on daily commuting costs, making it a long-term financial benefit, and they improve their health and well-being, which can lead to fewer sick days and increased productivity. For an employer, offering a tax efficient scheme like this boosts employee morale and engagement while lowering business costs. This boosts employee morale and engagement while lowering business costs another smart way to balance the rising NIC rates. So what are the key takeaways from these scenarios? Salary sacrifice schemes offer real, tangible benefits for both businesses and employees. These examples show how businesses can reduce their national insurance contributions, saving thousands annually, offer competitive benefits without increasing salaries, and improve employee retention by making high value perks more accessible. And, finally, enhance their reputation through eco-friendly and wellbeing focused schemes. And finally, enhance their reputation through eco-friendly and wellbeing-focused schemes.

Speaker 1: 15:37

With the NIC increase coming in April 2025, yes, I know I keep on reminding you now is the perfect time for a small business to explore salary sacrifice as a cost-saving solution. If you're wondering how this could work for your business, get in touch with us. We can help you find the best salary sacrifice scheme to suit your needs. So I've told you all the good things, but there are some pros and cons of salary sacrifice. Like any financial strategy, salary sacrifice has both benefits and drawbacks. While it can be a cost-effective solution for small businesses and an attractive perk for employees, it's not suitable for everyone and must be implemented carefully to avoid potential pitfalls. Let's take a closer look at advantages and disadvantages.

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So, first off, let's look at the pros. Firstly, it saves employers money on national insurance contributions. So one of the biggest benefits of salary sacrifice, as we said, is that it reduces the employer national insurance contributions. Since national insurance is based on employees taxable salary, any reduction in gross pay means the employer pays less in contributions. For small businesses facing the upcoming national insurance increase, this is a crucial way to offset rising payroll costs. The savings can be reinvested into the business, whether through employee benefits, training programmes or business growth initiatives. Two, it saves employee retention with better perks.

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Salary sacrifice allows businesses to offer valuable benefits without directly increasing salaries. This can boost employee satisfaction and retention. Particularly in competitive job markets are more likely to stay with the employer. That offers financial incentives, pension contributions or access to discounted perks like electric vehicles cycle to work schemes. In industries where pay rises may not be financially feasible, salary sacrifice can be an effective way to improve engagement without increasing wage bills. Three, employees save on tax and national insurance. Since salary sacrifice reduces taxable income, employees pay less tax and national insurance, meaning their take-home pay more money overall For pension salary sacrifice. This means employees get a higher pension contribution from their employer, boosting their long-term savings without affecting their immediate net pay significantly. In schemes like electric vehicles, employees can access high value benefits at a lower cost if they purchase them independently. And finally, it supports long-term employee financial well-being. Many sacrifice schemes are designed to improve financial stability for employees. Pension salary sacrifice is particularly beneficial for young employees as it encourages early retirement savings, reducing financial stress later in life. Cycle to work and EV schemes not only help employees save money, but also promote healthier and more sustainable commuting options, and employees appreciate employees who help them make smarter financial decisions, leading to a greater loyalty and engagement in the long run.

Speaker 1: 19:11

Okay, so all this positivity, there has to be some drawbacks. So first, off, the cons of salary sacrifice. One, it reduces gross pay, which could affect and I stress, could affect statutory payments like maternity, paternity and redundancy pay. Since statutory payments such as maternity, paternity, sick pay and redundancy pay are calculated based on gross salary, employees who participate in salary sacrifice may receive lower payouts if they claim these benefits. For example, an employee on maternity leave might receive the lower maternity pay than expected because their pre-leave salary was reduced through salary sacrifice. Employers must clearly communicate these potential impacts before implementing a scheme, ensuring employees make informed choices.

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Two, could impact mortgage affordability checks for employees. When applying for a mortgage or loan, some lenders assess affordability based on gross salary. If an employee is using salary sacrifice, their stated gross income appears lower, which could affect their ability to secure a mortgage or impact the amount they could borrow. This is actually changing quite a lot now, and quite a few lenders are actually allowing the salary sacrifice to be included. This is particularly important for employees who are first-time buyers or looking to remortgage. Employers should provide employees with the necessary information to discuss this with mortgage lenders before committing to salary sacrifice schemes.

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Thirdly, it requires clear communication to avoid misunderstandings. Employees may not fully understand salary sacrifice or assume it means they are losing money, leading to confusion and pushback. If not explained correctly, employees might worry that a reduction in gross salary means they're a worse off, even though they actually benefit in the long run. Employers need to properly communicate how the scheme works, what it means for take-home pay and any potential downsides before rolling it out. Downsides before rolling it out, they may require HR support, informational sessions or even one-to-one discussions to employ employees make the right financial decisions.

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So if you've decided to implement one, how do you do it? So introducing a salary sacrifice scheme can be a game changer for small businesses looking to offset the national insurance costs whilst enhancing employee benefits. However, to ensure a smooth implementation and full compliance with HMRC regulations, it's important to follow a structured process. Here's how to do it effectively. Step one identify which benefits make sense to your business. So, before setting up a salary sacrifice scheme, you need to evaluate which benefits align with your business goals and employee needs. So you should consider what do employees value most? Would they benefit from enhanced pension contributions, an EV lease scheme or cycle to work options? What savings are you aiming for? Are you looking to reduce national insurance costs or reinvest those savings into other employee benefits? What's feasible for your business? Some benefits, like cycle to work schemes, require an upfront investment, while others, like pension contributions, have fewer cash flow implications. My tip conduct a quick employee survey or hold discussions to gauge which benefits would be most appreciated and utilised.

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Step two consult an HR expert to ensure compliance. Like me, salary sacrifice must be legally compliant and mistakes can lead to unexpected tax liabilities or HMRC penalties. Consulting an HR or payroll expert ensures that the agreements are structured correctly following HMRC rules. Employees don't fall below national minimum wage due to salary reductions. The right tax and national savings are applied for both employer and employee, and the scheme is properly documented, with clear terms on how employees can opt in or out. An HR consultant can also help you with draft salary sacrifice agreements, updated employment contracts where necessary and set up the scheme seamlessly in payroll systems. If you're unsure where to start, seeking professional advice is essential to avoid compliance risks.

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So step three is clearly communicate with employees. A well-designed salary sacrifice scheme won't be effective if employees don't understand it or feel uncertain about its impact. Transparent communication is key. Hold an informational meeting or webinar. Hold an informational meeting or webinar. Explain how salary sacrifice works in simple terms. Provide real-life examples to show how employees can benefit financially and address common concerns, such as its impact on pensions, statutory payments and mortgage applications. Make sure you provide written documentation. Make sure you provide written documentation a clear employee guide outlining the benefits, tax savings and potential implications. Faqs to address common questions and misconceptions. An easy opt-in process so employees can make an informed decision.

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My top tip some employees may hesitate to join a scheme because they think salary reductions mean taking home less pay. Be sure to explain the tax and NI savings in a way that highlights the long-term benefits. And then, finally, step four implement and monitor the scheme's impact. Once the scheme is set up, you'll need to track its effectiveness and ensure that both employers and employees are benefiting. Key actions include monitor cost savings, review how much NI your business is saving and assess whether the scheme is financially sustainable for your business. Evaluate employee take-up, track how many employees choose to participate and gather feedback to see if there are barriers preventing more people from joining, and finally adjust the scheme as needed If take-up is low. Revisit how the scheme is communicated or consider offering different benefits. If employees are concerned, address them proactively and build trust in the programme. As we wrap up, let's revisit the key takeaways from today's episode.

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Salary sacrifice isn't just a tax saving tool. It's a smart way for businesses to manage rising costs while offering meaningful financial perks to employees. With the national insurance increase, small businesses need practical cost-saving strategies that don't compromise employee well-being. Salary sacrifice schemes provide an opportunity to reduce payroll costs, help employees save on tax and national insurance, and improve overall employee satisfaction and retention. Whether it's pension contributions, ev leasing or cycle to work schemes, businesses that implement salary sacrifice effectively and compliantly can see long-term financial benefits for both the company and its employees.

Speaker 1: 27:21

At KUHR, we specialise in helping small businesses navigate salary sacrifice schemes, ensuring they're legally compliant, financially beneficial and easy to implement. Here's how you can take action today. If you're a small business owner feeling the pressure of the rising NIC, let's chat. We can help you set up a salary sacrifice scheme tailored to your business needs. If you found this episode useful, subscribe to the podcast. We share practical HR hacks and strategies to keep your business thriving. Don't forget to leave a review and share this episode with fellow business owners who might find benefit from Salary Sacrifice Insights. Follow us on LinkedIn and Instagram for more expert HR advice, industry updates and exclusive resources to help your business stay ahead. Thanks for tuning in. Stay productive, stay informed and, until next time, keep building a smarter, more financially efficient business.