Budget 2024: Why Employers Need to Consider Salary Exchange More than Ever
Labour’s 2024 Autumn Budget introduced major tax reforms to fund government spending and support wage increases. With an estimated £40 billion in tax hikes and spending cuts, business owners will bear much of this burden, facing the largest tax increase since 1993. A key factor is the rise in employer National Insurance (NI) contributions from 13.8% to 15%, expected to generate an additional £25 billion each year by 2025. Here’s why businesses should consider salary exchange (salary sacrifice) as a vital strategy to manage these new costs.
Key Budget Changes Impacting Businesses
The budget included two important changes to National Insurance:
Increase in Employer NI Rate: Starting in April 2025, the employer NI contribution will increase from 13.8% to 15%. This 1.2% increase will add significant ongoing costs to every employee’s salary that exceeds the secondary NI threshold.
Lowered NI Threshold: The threshold for when employers start paying NI contributions will drop from £9,100 to £5,000. This means businesses will pay NI contributions on more of their employees’ earnings, which will particularly impact small businesses and those employing many lower-paid staff.
Employment allowance: The Employment Allowance is a government initiative that allows eligible businesses to reduce their NI liability. This allowance will increase from £5,000 to £10,500 to help SMEs manage the extra costs provided by the above two NI changes.
Together, these changes will significantly raise payroll tax expenses, making it crucial for employers to find ways to reduce these costs while still providing benefits and maintaining employee take-home pay.
How Salary Exchange Helps Offset the Impact
Salary exchange allows employees to give up a portion of their salary in exchange for benefits like pension contributions. This benefits both employers and employees since a lower gross salary means lower NI contributions for that portion of income.
Benefits of Implementing Salary Exchange Now
Reduction in Employer NI Contributions: Salary exchange can lower the total salary that is subject to NI. For an employer with ten employees earning an average salary of £35,000, implementing salary exchange for pension contributions could save around £2,625 per year on NI contributions after 2025.
Enhanced Employee Take-Home Pay and Benefits: Salary exchange can also increase employees’ net pay. In this scenario, each employee would see an average increase of about £140 in their net pay, while still maintaining their pension contributions. Employers can also choose to allocate some of the NI savings back to employees’ pensions, enhancing retirement benefits without raising payroll costs.
Strategic Cost Management: Given the NI rate increase and lower threshold, salary exchange offers a way to manage payroll expenses without hurting employees’ net pay.
Example Impact Calculation
Let’s look at a hypothetical employer with ten employees earning £35,000 each. The following table illustrates the current and projected National Insurance bills, along with the potential savings from implementing salary exchange:
| Description | Current NI Bill (2024/25) | Projected NI Bill (2025/26) | Projected NI Bill with Salary Exchange |
|---|---|---|---|
| NI Threshold | £9,100 | £5,000 | N/A |
| Employer NI Rate | 13.8% | 15% | N/A |
| Annual NI Contributions | £35,742 | £45,000 | £42,375 (saving £2,625) |
| Average Employee Net Pay Increase | N/A | N/A | £140 per employee |
| Total Employee Benefits | N/A | N/A | £262.50 (including pension) |
Why Now Is the Time for Action
The increased NI rates and lower thresholds mean businesses will face growing tax liabilities. Implementing salary exchange schemes allows employers to manage these additional costs while supporting their employees’ financial well-being, which is crucial as living costs rise.
In summary, Labour’s 2024 Budget represents a significant change for employers navigating a challenging economic landscape. Salary exchange is a practical tool for reducing payroll taxes, enhancing benefits, and retaining employees more affordably. This strategy is essential for business owners looking to maintain financial stability in the coming years.
Partner with Husky
Husky has been in operation for over 12 years and currently supports over 2,000 clients across the UK. We specialise in setting up and managing workplace pensions, payroll, and salary exchange—all in one place.
We implement Salary Exchange through our automated app process, providing a unique and straightforward way to get it done while ensuring compliance. Our easy-to-use solutions save employers both time and money by handling everything automatically. This means no need for extra admin, employment lawyers, or communication hassles—it’s all taken care of through Husky!
If you’re interested in learning more, you can book a demo with us today!
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