Cost saving strategies to maintain your workforce

Employee reward: balancing cost and retention

UK organisations are struggling with the financial strain of providing competitive employee rewards. Certain issues exacerbate this challenge:

• Frozen tax thresholds are pulling more employees into higher income tax brackets.
•  The recent cost of living crisis has prompted employees to seek better reward packages.
• The confirmed changes in employer National Insurance Contribution (NIC) by reducing the Secondary Threshold from £9,100 to £5,000, meaning employer NIC gets charged as soon as the employee earns more than £5,000 and also the increase from 13.8% to 15% from April 2025 in the general percentage.

These factors create financial strain on employers when offering attractive reward packages to retain talent. As such, it’s important for organisations to explore cost-reduction strategies without compromising employee satisfaction. The Budget has brought this to an even sharper focus. For example, for every employee working full time and earning £30,000, the additional NIC cost will be:

• Reduction in Secondary Threshold to £5,000 – this will add £615 in employer NIC costs per employee (9,100 - £5,000 x 15%).
• The 1.2 percentage point increase from 13.8% to 15% creates an additional employer NIC of £250 on the pay between £30,000 and £9,100.
• The overall increase is therefore £865 for one employee. Where there are 500 employees, the overall increase is £432,500. This is before even considering pay increases due to National Living Wage changes and how businesses can maintain pay differentials. Overall, this is a significant additional cost on a business.

There was some relief for employers as the Government announced that the Employment Allowance will be extended from £5,000 to £10,500 from April 2025 and be made eligible to all UK employers (subject to other eligibility criteria) in contrast to only organisations paying a total annual employer NIC bill not exceeding £100,000. Although this will help to support smaller organisations in the UK with their employer NIC costs, this may come of little relief to medium and larger organisations, given the above circumstances and their likely significantly larger employer NIC obligations.

For those medium and large organisations, there are three key areas via salary sacrifice for businesses to achieve cost savings while enhancing their employee reward offerings: Pension Salary Sacrifice (PSS), Bonus Waivers, and Electric Vehicle (EV) Salary Sacrifice.

Pension Salary Sacrifice

One of the most effective methods for businesses to save on costs is through Pension Salary Sacrifice (PSS). This arrangement allows employees to sacrifice a portion of their salary in exchange for increased employer contributions to their pension. As the salary is sacrificed, both the employee and employer save NIC on those amounts, whilst maintaining the same value of pension contributions.

Given the current Employer NIC rate of 13.8% and the impending increase to 15% (from April 2025), PSS can lead to savings for employers. Employees also benefit from NIC savings based on their earnings level.

Taking our earlier example forward, if all 500 employees are eligible, and, assuming the current employee pension contribution rate is 5% of basic pay, from April 2025, the potential savings created by PSS will be:

• Total Annual Employer NIC Saving = £112,500 (£30,000 x 5% x 15% x 500)
• Total Annual Employer Apprenticeship Levy Saving = £3,750 (£30,000 x 5% x 0.5% x 500)
• Total Annual Employer Saving = £116,250

Total Annual Employee increase in employee net pay = £60,000, or £120 each (£30,000 x 5% x 8%).

Bonus Waivers

Employers could also consider Bonus Waivers, where employees forgo their bonus in favour of an employer contribution to their pension scheme. This approach similarly provides NIC savings for both parties and reduces the employee's income tax burden on the bonus, helping them save towards retirement.

Electric Vehicle Salary Sacrifice

As the government emphasises climate initiatives, EV Salary Sacrifice schemes emerge as an effective way to reward employees while contributing to desired government sustainability goals. Currently, the Benefit in Kind (BIK) rate for electric vehicles stands at just 2%, offering substantial tax advantages compared to traditional company cars. This arrangement not only reduces costs for both employers and employees but also aligns with corporate social responsibility objectives. Although the Autumn Budget has confirmed that the EV BIK rate is due to increase by 1 percentage point each tax year from 2025/26 to 2027/28 and then 2 percentage points in 2028/29 and 2029/30 so that by April 2029 it is at 9%. This is however likely to remain an attractive salary sacrifice to offer given the savings it can create for certain employee populations.

Where the employee does significant business mileage, it is worth evaluating this more critically given the current 45p per mile rate available to be paid to own car drivers.

How we can help

If you're interested in exploring these cost-reduction strategies further or have any questions about implementation, our team is here to support you. We can provide guidance on regulatory requirements, create necessary documentation, and effectively communicate changes to your workforce. You can also use our employment cost calculator to help determine the percentage increase in your overall pay bill due to the impending rise to the National Living Wage and increased Employer National Insurance Contributions.

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