Harrison Smith is a financial adviser based in Hartlepool and is associated with Emerald Associates. Harrison offers an insight into money matters in an exclusive monthly column for North East Connected.
Businesses are always looking at ways to become more efficient financially. After all, efficiency in a business creates more opportunities, allowing it to become a more productive entity.
The drive for efficiency is more crucial than ever in today’s challenging and ever-changing global landscape, which has created a difficult landscape for many SMEs and large businesses alike across the UK.
Looking closer to home, recent legislative changes have made navigating financial complexities even more difficult for these enterprises than previously experienced.
If we cast our minds back to the Autumn budget of 2024, one of the big areas of controversy surrounded changes to taxation on employer national insurance and inheritance tax.
When it came to inheritance tax, the changes made were specific to the reliefs available for business and agricultural assets.
From April 2026, inheritance tax for those business and agricultural assets will be capped at £1m. The current and previous government allowed for up to 100 per cent business or agricultural relief.
But what does this mean moving forward? For businesses being passed on with a value of more than £1m, it will now be the responsibility of the estate receiving those assets to pay this inheritance tax.
This can cause significant problems when considering the structure of businesses and agriculture, like farms.
However, a more immediate and significant change which is likely to have a substantial effect on everyday business operations and profitability is the shift in employer National Insurance contributions.
As I have mentioned in previous columns, prior to April 6, 2025, employers paid 13.8 per cent secondary Class 1 National Insurance contributions on their employees’ salaries. From that date, employers now pay 15 per cent. Prior to April 6, 2025, employers began paying
these contributions from a threshold of £9,100; following this date, employers now pay them from a £5,000 threshold.
As a result, these changes collectively mean businesses will almost certainly be paying more in National Insurance than previously.
When accounting for expected pay rises, which most employers commit to, this has a compounding effect both in terms of salary outgoings and National Insurance responsibilities.
So, how can businesses mitigate these rising costs and enhance their financial efficiency considering these changes? A powerful, yet often underutilised, solution explored by many of my corporate clients is salary sacrifice as a method of paying pension contributions.
Typically, pension contributions are taken in one of two methods: the net pay method or relief at source method.
To explain how salary sacrifice pensions work: An employee effectively agrees with their employer to sacrifice a portion of their salary, which is then directly contributed to their pension by the employer.
Let’s consider an employee being paid £30,000-a-year who currently makes minimum pension contributions, for example £1,500 annually, via the net pay method. Under this traditional approach, they would be contributing £1,500 a year to their pension and taking home a net pay of £23,919.60.
If we now consider the same employee sacrificing those contributions from their salary, their gross pay would be reduced to £28,500, with the other £1,500 going into the pension directly from their employer via salary sacrifice.
The immediate result for the employee would be an increase in their net take-home pay to £24,039.60 – an increase of £120 annually.
While the employee benefits are clear, the efficiency gain for the employer in this method of pension contribution is also significant.
In this typical situation highlighted above, the employer, by offering salary sacrifice, would save £225 per year in National Insurance contributions for this single employee. Imagine the cumulative savings across an entire workforce.
This reduction in employer National Insurance liability directly translates into cost savings and improved financial efficiency for the business.
With this method you have to be mindful that an employee’s reported gross salary will be lower and as a result, this could impact their ability to borrow for personal needs, such as mortgages.
However, the potential for substantial employer savings makes it a strategy well worth exploring.
Businesses need to stay on top of changes in legislation, with the flexibility to be adaptable in the changing landscape. Financial planning for businesses can help alleviate many concerns and assist in identifying ways to make businesses more efficient.
*To explore how tailored staff perks and benefits, including salary sacrifice, can benefit your
business, connect with Harrison through his advisor hub: https://linktr.ee/harrisonsmithea