How Salary Sacrifice Schemes Can Help Employers Mitigate the Effects of Employment Law Changes in April 2025
In the UK, employers face a range of challenges as they adapt to upcoming changes in employment law, particularly those set to come into effect in April 2025.
Among these changes, one of the most significant is the increase in employer National Insurance (NI) contributions, which will impact a wide range of businesses. However, there are strategies employers can implement to help mitigate the financial burden of these changes. One such strategy is the use of salary sacrifice schemes, which not only offer a financial advantage but also contribute to a more engaged and motivated workforce.
The National Insurance Changes in April 2025
As part of the government’s effort to adjust to economic conditions, April 2025 will see changes to employer National Insurance contributions (NICs) and the thresholds at which these contributions apply. Specifically, employers will face an increase in the rate at which they contribute to National Insurance, and the thresholds for qualifying earnings will change. This means that many businesses will see higher costs when it comes to paying their employees, as the increased rate will affect a large portion of their payroll.
The increase in employer NICs could be a significant financial challenge for businesses, particularly smaller companies that operate on tight margins. For example, if an employer’s total payroll increases significantly as a result of pay raises or other factors, their NICs will also rise. While these changes are unavoidable, there are strategies available to employers to help reduce the financial impact, and salary sacrifice schemes are one of the most effective methods.
How Salary Sacrifice Schemes Help Employers
A salary sacrifice scheme allows employees to exchange part of their gross salary for a non-cash benefit, such as a bike, pension contributions, or other perks. Because the sacrificed salary is deducted from the employee’s gross earnings before tax and National Insurance, this can reduce the amount of salary on which both the employee and employer are liable for tax and NI contributions.
For employers, this translates into a reduced National Insurance liability. By offering employees the opportunity to sacrifice part of their salary in exchange for benefits, such as the popular Cycle to Work scheme, businesses can reduce the total amount of salary subject to employer NICs. This can result in substantial cost savings, particularly for businesses with a large number of employees.
The Cycle to Work Scheme as a Key Example
One of the most well-known and widely used salary sacrifice schemes in the UK is the Cycle to Work scheme. This government-backed initiative has already enabled over 2 million UK employees to obtain a bicycle and cycling accessories through a salary sacrifice arrangement, thereby reducing both their income tax and National Insurance contributions. The Cycle to Work scheme, provided by companies like Cycle Solutions, enables employees to save up to 47% on the cost of a new bike and accessories, which is a substantial benefit.
For example, a typical employee choosing a Specialized Allez Road Bike through Cycle Solutions’ Cycle to Work scheme, would currently be able to spread the cost over 12- or 18-monthly payments (with no credit referencing required) and they would stand to make a saving of £366.40 versus the current retail price of £1000:
But the savings do not apply just to employees who participate in the Cycle to Work scheme.
For employers, the Cycle to Work scheme provides a way to lower their National Insurance liabilities. By encouraging employees to participate in this scheme, employers can help reduce the total amount of salary that is subject to the higher NIC rates in 2025. Additionally, businesses can promote a healthier, more sustainable commuting culture, which can lead to a more satisfied and engaged workforce—further improving overall business performance. Using the same example of a £1000 bike provided through the Cycle to Work scheme, from April 2025, employers will reduce their own National Insurance liabilities by 15% or £150 over the course of the salary sacrifice period.
So, by promoting the Cycle to Work scheme, employers can improve the health and wellbeing of their workforce, reduce their own Scope 3 greenhouse gas emissions, and make significant savings from their wage bill.
Other Salary Sacrifice Options
In addition to the Cycle to Work scheme, employers can consider other types of salary sacrifice schemes to reduce their NIC liabilities, such as:
- Pension Contributions: Employers can offer enhanced pension contributions through salary sacrifice, which reduces both the employee's and employer’s NI contributions.
- Childcare Vouchers (closed to new applicants):Replaced by Tax-Free Childcare, but still available to those enrolled before October 2018.
- Electric Car Schemes: Employees lease electric vehicles through salary sacrifice, benefitting from tax savings and lower running costs.
