Salary exchange, also known as salary sacrifice, is an arrangement where employees agree to reduce their gross salary in exchange for a non-cash benefit, typically a pension contribution.
The employer will also contribute along with the sacrificed salary into the pension scheme, effectively reducing the employee’s National Insurance contributions (NICs) and potentially increasing their take-home pay.
But is a salary exchange scheme a good idea for both the employee and the employer?
Benefits for the Employee
Entering a salary exchange scheme is worthwhile, especially to help grow your retirement fund. Your salary is reduced by the cost of any benefit you choose, provided your salary remains above the national minimum wage. Thereafter employees who agree to give up part of their salary in return for a non-cash benefit, being a contribution to a pension plan, will benefit from tax savings:
- When you pay into your pension using salary sacrifice, your wages are reduced by the same amount therefore:
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- Your tax and National Insurance is calculated on your lower salary, meaning you get to keep more of your income.
- Your employer will then usually pay that amount into your pension, along with your own contribution, increasing the overall value of your pension.
- If you are near to the threshold for the next tax level it can reduce your salary below the relevant threshold. It is worth noting that the choice of benefits varies between employers, but often includes:
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- Employer pension contributions
- Cycle to work schemes
- Company car
- Childcare vouchers
Overall, salary exchange can be a good strategy for boosting retirement savings and giving you tax benefits, but it’s important to consider the potential drawbacks. Discuss your circumstances with your employer/pensions advisor before deciding if salary sacrifice is right for you.
Some areas you may need to consider in these conversations are:
- On paper a reduced gross salary may affect your ability to borrow where lenders assess affordability based on gross income.
- Eligibility for some state benefits may be affected, such as lower average pay for calculating Statutory Maternity Pay.
- It may affect salary-based employer benefits, such as Life Assurance or Income Protection coverage, due to lower salary levels.
- If you are on a lower wage, you may not be eligible to join a salary sacrifice scheme as your new lower salary cannot take you under the National Minimum Wage.
Benefits for the Employer
Salary exchange is a great way to help employers improve their employee benefits package and save money, while generating additional revenue, boosting profits or reinvesting the savings back into the business.
- With the changes to the National Insurance thresholds triggering an increase in the NI paid by employers, by reducing the taxable income on which NI is calculated, employers can save on their NI liabilities.
- Salary exchange schemes, particularly those involving pension contributions or other benefits, can improve employee morale and retention.
- Offering an attractive benefits package, including salary exchange, can help employers attract and retain employees.
- Demonstrating a commitment to employee well-being through salary exchange can positively impact a company’s reputation.
- The savings from reducing NI payments can be reinvested, strengthening the business’ financial position or funding other initiatives.
Setting up a salary exchange scheme
At Randall & Payne, it is simple to implement the salary exchange option but is dependent on the pension provider used. The changes are made to the employee’s contract, and once this is signed, the details of the new salary and pension contribution adjustment is entered into the payroll. That’s it, no need for new systems or software.
Maryann Hunter, Payroll Manager, is happy to advise – please contact Maryann on 01242 776000 or email payroll@randall-payne.co.uk.
