Employers’ NIC – cost savings and your employee remuneration offering

Employers’ NIC – cost savings and your employee remuneration offering 

Contributed by Lewis Howarth, Associate Director in Employment Tax, BDO LLP 

There has been much discussion about the rising costs of doing business since the Autumn Budget, particularly with the increase in employers’ NIC rates from April 2025. For many businesses, employee remuneration, both in cash and non-cash form, is their single largest expense. With that in mind, employers can expect an additional 1.2% increase in their costs, unless they re-evaluate the reward package more broadly. Any re-evaluation of the reward package should consider not only the tax/NIC costs but also the perceived value in the hands of the employee. 

The solution? 

If you were hoping for a straightforward solution to avoid the increase in employers’ NIC, then this is not the article for you or your business. However, with pressure comes an opportunity to think a little differently around how this 1.2% cost increase can be addressed more strategically. With many employers simply stating that reductions will be seen in future bonus pots or pay rises, due consideration needs to be given to the broader impact on employees, both in terms of financial and perceived value. 

So, what could employers consider? 

• Review your reward package

Many employers offer a range of non-cash benefits at a not insignificant cost to the business. This presents employers with an opportunity to review their reward package to understand whether employees are utilising these benefits and that the cost incurred by the business delivers value. 

Developing an effective employee remuneration package is complex and will vary from business to business depending on your workforce demographic, sector and geographic location. As we work in an increasingly competitive, complex and diverse workforce environment, it is remiss for any employer to overlook the importance of reviewing their reward package to ensure it delivers value for all parties. Through a review you can understand if it is worthwhile continuing to provide a benefit, even with the potential costs increases. For example, you might choose to continue offering company cars but decide to offer only electric vehicles and no new double cab pick-ups from April 2025 onwards. 

• Pension salary sacrifice schemes

If you’re not already offering pension salary sacrifice, now is a pivotal time to reconsider why that is – given the income tax and NIC savings available to both employees and employers. For those already operating a scheme, it is worthwhile gaining an understanding of which of your employees are enrolled and contributing. If participation is lower than expected, it may be due to a lack of understanding of the short/long-term benefits of saving for their futures. Furthermore, the cost-of-living crisis in recent years saw employees reduce their contributions to take home more cash, perhaps without re-evaluating the impacts in the longer term. 

Whether you implement a scheme now or seek to encourage greater uptake of an existing scheme, both employees and employers can experience a sizeable financial benefit. In my experience, the main inhibitor to employee uptake of such schemes is a lack of awareness and/or understanding of these benefits. Therefore, it is imperative that employers adopt an effective communication strategy – particularly for employees at key earnings thresholds (e.g. at £60,000 and £100,000) as they have the most to gain. 

• PAYE Settlement Agreement (PSA)

Many employers settle the income tax and NIC due (engrossed) on ad-hoc benefits provided to employees on their annual PSA return. The PSA often comes at a significant cost, one that will increase further with the pending Class 1B NIC rise. Added to this, the liability often comes as somewhat of a surprise to the business owing to the delay between the tax year-end and the timing of the PSA payment – about six months after the end of the tax year. 

Employers should review the availability of existing tax reliefs and exemptions in the legislation. With many available to employers, it can be easy to misunderstand and/or completely miss a relief/exemption that could reduce the liability. In some cases, a review may also help to identify any historic over-reporting and potential refund claims, whilst also better informing the future PSA review process. 

• Re-allocation of funds

If we accept that employers will reduce bonus pots and pay rises, then perhaps employers may wish to consider how some of that money could still benefit employees without the associated tax/NIC costs. As noted above, current legislation allows for a range of employee benefits to be provided without an associated income tax and NIC charge. 

For example, the subsidised meals exemption allows employers to provide meals to employees at the workplace without a tax/NIC charge, subject to several conditions. Employers can offer such a benefit, with a clear understanding of the associated costs, which employees can benefit from in the workplace, helping to increase employee presence in the office and delivering a tangible benefit in the process. 

The above is just one simple example of the exemptions available to employers, and while there remains a cost to the business, it avoids a charge to income tax and NIC. Of course, each exemption comes with its own set of conditions, but providing due consideration is given to these, then there is no reason that an employer should be missing out on the opportunity to use them for the benefit of all parties. 

Summary 

There is no quick fix to avoid the upcoming increases to employers’ NIC, but employers should consider whether they’re maximising the available income tax reliefs and exemptions available to them. Now is the perfect time to re-evaluate whether steps can be taken to better manage expenditure and deliver maximum employee satisfaction. In some cases, there may be an opportunity to achieve both: the more win-win situations you can find, the better your business will cope with the increases ahead.