Autumn Budget - how to save on additional NI costs

In the run up to the budget, I think there were more rumors around potential changes to pensions than any other area. But thankfully that old adage “there’s no smoke without fire” didn’t apply here.  

The Government inherited a tricky fiscal situation, and so it was clear that tough decisions were necessary to balance economic growth with the need to raise money through taxes.  However, the question remained how much pensions would need to contribute? 

Despite all the noise beforehand, there was only one major change to be aware of and that’s around the treatment of pensions on death. Although currently pensions left by anyone aged over 75, are taxed at the beneficiaries’ marginal rate, pension pots are usually passed on free of inheritance tax. From 2027 any unused pensions will be subject to inheritance tax. 

There is an open consultation on this and so more details in terms of its exact application are still to come. We will keep you updated on this. 

Increased NI costs – salary exchange can save companies money 

Perhaps the biggest concern for employers is the announced rise in employer National Insurance costs from April next year. Although this is not about pensions, some of these increased costs could be offset against pension contributions paid by your employees. It’s called Salary Sacrifice or Salary Exchange as we like to call it. 

Basically, if you already offer it, you will be saving even more money from April and if you don’t already do it, then it is something that you may wish to consider. But before I explain more about that, just to confirm the exact changes to National Insurance costs.  

Firstly, from April next year, the rate will increase from 13.8% to 15% and the secondary threshold will reduce from £9,100 to £5,000. Effectively a double whammy. The employer will be paying a bigger percentage cost on a bigger portion of every employee’s salary. 

But there is help for smaller employers who are eligible for Employment Allowance. This will increase at the same time from £5,000 to £10,500 which according to the Chancellor means that nearly 900,000 employers won’t pay any national insurance contributions and over 1 million will pay less or the same next year. 

To qualify, your employers’ Class 1 National Insurance bill for the previous tax year needs to be less than £100,000. There are other rules that you will need to check.

Salary exchange is a win-win 

But for all other employers, salary exchange can help soften the blow and at the same time put some extra money into your employees’ pay packets. It’s a win-win and it doesn’t cost anything to implement. 

For example, for an employee earning £33,000 a year the current employer national insurance cost (not considering the employment allowance) is £3,298 a year. From April this will increase to £4,200, a massive £902 extra cost or a 27% increase. 

But if this same employee paying a 5% pension contribution decided to do salary exchange, this would reduce the company’s NI in 2025 from £4,200 a year to £3,953 a year representing a massive £247 a year saving.  

For a company with 50 employees, this could mean a saving of nearly £12,500 a year.  

At the same time the employee will have an extra £132 a year in their salary – not to be sniffed at, given the current cost of living pressures. 

Some other points to note 

Just to be clear, despite the pre-budget speculation, pensions tax relief and tax-free cash allowances remain unchanged. 

Sticking to savings, thankfully all the ISA limits are staying the same which is good, but the downside is they will remain static until April 2030. Given the immediate increase to the main rates of Capital Gains Tax, the basic rate rises to 18% and the higher rate rises to 24%, wherever possible people will want to maximise their ISA allowances each tax year.  

Falling under the heading of income, the main point to be aware of is that from April next year, both the national living wage and the national minimum wage will increase to £12.21 and £10 an hour respectively. An important point to note here is that with salary exchange, an employee’s gross earnings cannot fall below these levels, so basically anyone on minimum wage won’t be able to do salary exchange.  

Final thought

If you don’t already do so, salary exchange is not only a way to save money for the company but it’s also a way to put some extra money into employees’ salaries whilst maintaining the same level of pension contribution. It doesn’t cost anything to implement and so is a real win-win. 

 The contents of this blog are for information purposes only, are based on NatWest Cushon’s understanding of the changes from April 2025 and are not personal advice . Any calculations are meant to be for illustrative purposes only. 

Article by

Steve Watson, Director of Policy & Research