How employers can reduce rising employment costs

As employment costs continue to rise, the conversation around employee benefits is changing. Increasingly, employers are asking not what additional benefits employees would value, but which benefits they can afford to keep.

Against this backdrop, salary sacrifice is receiving renewed attention. Once viewed primarily as an HR benefit, it is increasingly being recognised as a practical way to manage costs while continuing to offer valuable employee benefits.

Why are rising employment costs changing the employee benefits conversation?

What is salary sacrifice?

Why are more organisations reassessing salary sacrifice?

Why has salary sacrifice become a boardroom priority?

How should employers review their current benefit strategy?

Rising employment costs are creating difficult decisions for employers. Alongside higher employer National Insurance contributions, organisations continue to face wage inflation, increasing pension obligations and growing expectations around employee wellbeing. As a result, many HR and finance teams are being asked to deliver more with less.

This is reflected in business priorities; according to the CIPD's most recent Labour Market Outlook, 58% of organisations cited cost management as their highest priority, regardless of sector or organisation size. For many employers, the conversation is becoming less about introducing new benefits and more about protecting the benefits employees value most.

The challenge is that reducing benefits can negatively affect talent attraction and retention. In today's labour market, employees increasingly evaluate the overall reward package rather than salary alone, meaning cuts to valued benefits can have unintended consequences for workforce satisfaction and turnover.

This is why many organisations are exploring alternatives such as salary sacrifice, which can help reduce National Insurance costs while continuing to offer valuable employee benefits.

At its simplest, salary sacrifice is an arrangement where an employee exchanges part of their gross salary for a workplace benefit. Common salary sacrifice arrangements include:

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  Pension contributions
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  Electric vehicle schemes
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  Cycle to Work programmes
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  Technology schemes

As the adjustment is made before tax and National Insurance calculations, both employer and employee may benefit from lower National Insurance contributions. For employers, this can reduce the amount of salary subject to employer NICs, helping improve cost efficiency while continuing to offer valuable employee benefits.

The impact becomes more significant as employee participation increases, making salary sacrifice an increasingly attractive option for organisations looking to manage rising employment costs without weakening their overall reward package.

Download our EV Salary Sacrifice guide.

Many of the concerns that have historically prevented organisations from adopting salary sacrifice schemes are still valid. However, the case for overcoming them is stronger than it has ever been. As employment costs continue to rise, employers are increasingly reassessing whether the reasons for saying "no" still apply.

For many businesses, the administrative commitment required to run a scheme has been one of the biggest obstacles. Contractual amendments, payroll changes and employee communications all take time, but provider support has evolved significantly in recent years. Many schemes now offer implementation, payroll and communication support to help reduce the burden on internal teams.

At the same time, both risk and affordability are being viewed differently. Greater protection against events such as long-term sickness or employee departures has helped improve employer confidence, while the growth of the used EV market and greater certainty around Benefit-in-Kind rates have created an opportunity to offer benefits that may have previously felt inaccessible to large parts of the workforce.

As a result, many organisations are taking a fresh look at salary sacrifice and finding it more compelling than it was just a few years ago.

Historically, salary sacrifice was often viewed as an employee benefit owned primarily by HR teams. However, today’s conversation increasingly involves finance leaders and senior decision-makers as organisations look more closely at the relationship between workforce costs and employee benefits.

The shift reflects a wider change in how benefits are being evaluated. Rather than focusing solely on employee uptake or satisfaction, organisations are now considering how benefits contribute to broader business objectives, from cost management and workforce planning to employee retention and financial wellbeing.

As a result, salary sacrifice is no longer simply an HR discussion. It has become part of a wider conversation about how organisations deliver employee value in a way that is both attractive to employees and sustainable for the business.

For organisations reviewing employee benefits, the first step is understanding where rising employment costs are having the greatest impact. With a full year of higher employer NIC contributions now reflected in budgets, many businesses are in a stronger position to assess the true cost of their current approach and identify areas where greater efficiency may be possible.

Rather than focusing solely on cost reduction, employers should review which benefits employees value most, how those benefits support attraction and retention, and whether there are alternative ways to deliver them. For many organisations, this will involve revisiting previous assumptions about salary sacrifice and modelling the potential savings available across their workforce.

The barriers that have historically caused organisations to hesitate have become more manageable, while the financial return available through salary sacrifice has become increasingly attractive. For employers looking to balance cost management with employee value, the question is no longer whether salary sacrifice can deliver benefits, but whether the reasons for dismissing it in the past still apply.

Related reading: Fleet Consultancy Services

Key Takeaways

• 1.
  1.
  Rising employment costs are changing how organisations approach employee benefits.
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  2.
  Reducing benefits may deliver short-term savings but can negatively affect attraction, retention and engagement.
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  3.
  Salary sacrifice can help organisations reduce employer National Insurance costs while maintaining valuable employee benefits.
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  4.
  Improvements in provider support, scheme protection and EV accessibility are encouraging many employers to reassess previous decisions.
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  5.
  What was once viewed as an HR benefit is increasingly being recognised as a strategic business tool.