What is Salary Exchange?

Salary Exchange (sometimes called salary sacrifice) is an agreement between you and your employees, where they agree to exchange part of their gross salary or bonus for an equivalent pension contribution.

Why you should consider Salary Exchange?

1. Reduce employer and employee National Insurance Contributions (‘NIC’)

2. Reduce employee Income tax

3. Maintain pension contributions whilst offering a better benefits package to staff at no extra cost

Practical Example - Employer benefits - 5 employees

Total Salary exchanged by employees = £7,500

Employer NIC rate 2022/23 = 15.05%

£7,500 x 15.05% = £1,128 NIC’s saved in year 1

Disclaimer: Figures are based on an average salary of £30,000 per employee, each exchanging 5% of their salary for a pension contribution. Employer yearly savings are the NI contributions that would be paid without salary exchange in place. These figures are subject to change due to the upcoming NIC lower threshold increase in July 2022.

Practical Example – Employee benefits

The employee gains £179 in take home pay.

Employee pension contributions remain the same.

The cost to the employer is reduced by £203.

Disclaimer: in this example no savings are reinvested into your employee’s pension plan.

Setting up Salary Exchange in your business

Setting up salary exchange in your business is a relatively straightforward process. You can offer the arrangement to some or all your employees, so long as their reduced salary doesn’t fall below the minimum wage.

They’ll just need to agree to an altered contract of employment, which can be done through an agreement letter or an opt-out option.

Some things to consider

There can be an increased level of administrative and HR work required with a salary exchange arrangement. You can manage those levels by having a default approach to how savings are reinvested.

You’ll need to ensure your employee payslips display the amount of the salary exchanged.

Can your payroll do this, or will it require additional resource?

Salary exchange may not be suitable for employees earning more than £240,000 as this can incur an additional tax charge

Because your employees’ yearly pre-tax salaries will reduce by agreeing to salary exchange, it can affect their entitlement to things such as statutory and salary-related benefits