The significantly higher payroll costs that will now become reality for many businesses are likely to have some serious consequences for many businesses – including small businesses and not for profit organisations.
This increase will place considerable financial pressure on SMEs, many of which are already managing tight margins. Research suggests that 37% of UK SMEs now cite tax as one of their biggest challenges and that 44% of UK SMEs say the increase in NICs will negatively impact them. Higher NI contributions are likely to lead to cost-cutting measures, such as reduced hiring, wage stagnation, or decreased investment in employee benefits.
With approximately 16.6 million employees working for SMEs in the UK, employer NI contributions will rise by £14.97 billion, from £54.75 billion to £69.72 billion annually. However, through the implementation of salary sacrifice schemes, this increase could be reduced by an estimated £4.11 billion.
What is salary sacrifice?
Salary sacrifice, also known as salary exchange, allows employees to redirect a portion of their pre-tax salary into non-cash benefits, such as pensions. This arrangement reduces the employee's taxable salary, leading to savings on both employee and employer NI contributions. For employers this can be hugely beneficial - by lowering the gross salary through salary sacrifice, employers decrease the amount subject to NI, thereby reducing their overall NI liability. It can also be helpful in overall cost management –salary sacrifice schemes can help offset the increased costs due to the NI rate hike and threshold reduction, aiding in maintaining financial stability.
Additionally, salary sacrifice isn’t just a cost-saving tool; it also encourages better retirement savings. Employees benefit from increased pension contributions, while employers save on NI costs—a win-win scenario.
Raising Awareness
Despite its advantages, salary sacrifice remains underutilised, partly because it hasn’t been widely communicated as a strategic response to rising NI costs. As businesses focus on immediate challenges, this simple yet effective tool often flies under the radar. This needs to change.
Rather than reinforcing the message that their hands have been tied and they have no choice but to hike business taxes, the government could be educating SMEs on the dual benefits of salary sacrifice: cost reduction and improved employee financial well-being. If they are able to persuade beleaguered, overwhelmed SME owners that this isn’t a complex tax strategy but, rather, is a straightforward way to manage rising costs while supporting staff, they could be throwing a lifeline to pressurised businesses. Heaven knows, they need this right now.
