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More companies say they will use salary sacrifice schemes to structure their employee pension arrangements to reduce the impact of tax changes announced in the Budget.

Businesses including J Sainsbury, JD Wetherspoon and BT have this week attacked Chancellor Rachel Reeves plans to raise up to £25 billion a year by increasing employers’ social security contributions from April next year.

The move has attracted a lot of interest salary sacrifice systemwhere employees forgo part of their salary in exchange for their employer paying these funds directly into their pension.

The arrangement, well established among larger employers but far less common among smaller companies, enables employees to pay less income tax because they receive a lower main salary. However, as employers’ national insurance is not levied on staff pension contributions, companies now have more incentive to use these schemes.

In the wake of the Budget, more than one in five small and medium-sized business owners said they were now “more likely” to use salary sacrifice arrangements for pension contributions, according to a survey of around 900 UK businesses commissioned by the Global Pay Confederation.

From April, the salary threshold at which employers start paying NI will be lowered from £9,100 to £5,000, and the tax rate will rise from 13.8 to 15 per cent.

Nick Bustin, employment tax director at chartered accountants Haysmacintyre, said conversations with clients in the days since the Budget had been “almost exclusively about pension pay sacrifice”.

While some smaller businesses will be able to use the enhanced Employment Allowance to cushion NI increases, not all will meet the criteria. “We’re talking to technology companies with low headcount, organizations in the health sector and the education sector,” he said.

Smaller businesses have traditionally shied away from such systems because of the complication it adds to their payroll process, but advisers said this is now likely to change.

“Historically, it hasn’t been worthwhile for them,” said Robert Salter, director at business consultancy Blick Rothenberg, adding: “What I suspect is that in the next few weeks, smaller companies will be looking at salary sacrifice.”

Under the current auto-enrolment pension rules, the total minimum contribution to a qualifying pension plan is 8 per cent of an employee’s earnings – 3 per cent of which must be paid by the employer. All 8 percent – ​​or higher depending on the pension policy – ​​is paid by the employer when an employee uses a pension salary sacrifice scheme.

“A critical question in any case is what happens to the employer’s NI costs that are saved: generous employers give it all back to the employee in extra pension contributions but this is not always the case,” says Tom McPhail, pensions specialist at consultancy Langkatten.

Steven Leigh, associate partner at professional services firm Aon, estimates that a small business with 10 employees each earning £35,000 would see a £9,200 increase in their NI bill after Budget changes.

But by paying 5 per cent of its employees’ earnings into pensions instead of wages, the company would save £2,625, offsetting around 30 per cent of the increase in employers’ NICs. The employees would save around £140 a year in employee NICs.

“The majority of companies with over 100 employees would already offer this,” Leigh said. “For the companies that don’t offer it, it’s become even more of a no-brainer.”

In assessing the merits of salary sacrifice schemes, advisers warn that employers must be careful not to reduce employees’ cash earnings below the minimum wage.

“It’s a big risk that businesses need to consider,” said Neil Carberry, chief executive of the Recruitment & Employment Confederation, a trade body for recruiters. “The minimum wage has increased by 26 per cent in the last three years – wages above £20,000 can be swept up.”

Employees should also be aware of their statutory maternity pay, adds Leigh. “Statutory maternity pay is linked to the salary at a certain time. So if someone were to use salary sacrifice, their pay could fall below a certain level, which could mean they have a lower level of statutory maternity pay later on.”

For higher-earning staff, the benefits of salary sacrifice are being able to navigate frozen income tax thresholds by saving more for a pension. Staff on the cusp of the £60,000 threshold, where child benefit starts, could save more for their pension and keep more of their benefits. Similarly, parents on the £100,000 limit would be able to keep valuable childcare benefits including tax-free childcare and ‘free’ hours of childcare.

Additional reporting by Claer Barrett