Employers may be able to use salary exchange as a way to mitigate the additional costs they are set to face as a result of the increase in employer National Insurance contributions (NIC), analysis from Royal London has found.

Chancellor, Rachel Reeves, previously announced plans to increase the rate of employer NIC from 13.8 per cent to 15 per cent, in a move that industry experts warned could represent a “major setback” to hopes of progress on Britain’s under-saving crisis.

In addition to this, Reeves announced that the threshold for employers paying NIC will reduce from £9,100 to £5,000, which, analysis from Royal London showed, will result in an increase in employer NICs of £615 per employee per annum.

Royal London senior pensions technical manager, Craig Muir, acknowledged that the increase in employer NIC announced in the Autumn Budget has created concern around increased costs, and its impact on growth, recruitment and overall profitability with many businesses.

“With employer NI rising to 15 per cent (up from 13.8 per cent), and the threshold reduced from £9,100 to £5,000, many businesses will face an increase in costs," he said, with research from Royal London suggesting this could have a knock on impact on pension offerings.

“In a small survey of employers carried out by Royal London post the Autumn Budget, some expressed concern, with many saying they’d look to reduce direct costs from employment, which may involve things like recruitment freezes or redundancies, or reviewing plans for growth/expansion," Muir explained.

“Some also suggested they may have to look at reducing their employer pension contributions or stop any increases to their contributions, ultimately impacting their employees’ pension pots."

However, Muir suggested that employers can mitigate some of their NI costs as they do not pay NI on their employees' pension contributions.

"And if they use salary exchange, they have the option to pass these savings on to their employees, which would increase pension contributions and potentially aid recruitment and retention," he explained.

"Alternatively, employers could opt to retain the savings for themselves or implement a combination approach, passing a percentage to the employees while keeping the remainder."

Indeed, analysis from Royal London showed that, if an employer with 100 employees in their scheme used salary exchange, and redirected 50 per cent of their NI savings, they could reduce their £82,100 NI cost by £14,600 and boost each employee’s pension contributions by £340 per annum.

"They could double their cost saving if they didn’t redirect any of the NI savings," Muir pointed out.

This was based on an average salary of £35,000, 5 per cent employee pension contribution (including 1 per cent tax relief) and 3 per cent employer contribution.

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