Small and medium-sized enterprises (SMEs) are bracing for a significant rise in National Insurance (NI) contributions after last year’s Autumn Budget, in which Chancellor Rachel Reeves announced higher employer NI rates and a lower threshold from 2025/26.
Although the Treasury expects to raise £25 billion annually to help plug a public finances deficit, concerns are growing that many smaller businesses will struggle with the extra cost — potentially curbing recruitment, wages and even pension contributions.
According to research from Moore UK, employer NI payments by SMEs alone could soar by almost £15 billion, from £54.75 billion to £69.72 billion, covering 16.6 million employees. With 37 per cent of smaller firms citing tax as a principal challenge — and many already operating on thin margins — cost-cutting measures seem likely. Reducing employee benefits or freezing pay are among the most common tactics that businesses employ under financial pressure.
However, a growing number of SMEs are adopting salary sacrifice schemes, which enable employees to exchange a portion of their salary for pension contributions or other non-cash benefits, thereby lowering the overall wage bill subject to NI. Analysts say such schemes could collectively save UK SMEs more than £4 billion annually, offsetting some of the Treasury’s NI increase. Proponents add that salary sacrifice also promotes stronger long-term savings among employees — a key consideration as the UK grapples with a looming pensions shortfall across multiple generations.
Despite these advantages, salary sacrifice remains under-utilised, partly because many business owners are unaware of how straightforward it is to implement. Some industry experts argue the government could do more to highlight salary sacrifice’s potential to reduce employer costs and, simultaneously, bolster employees’ financial security. In times of economic uncertainty, such measures might well be a lifeline for hard-pressed SMEs — and a timely means of easing the looming burden of higher NI charges.
