Making contributions using salary exchange
To make employee contributions through salary exchange, your employee would agree to give up part of their salary in exchange for a pension contribution. The method used for this process can vary, depending on the setup of your pension scheme.
Key information
- Understand how employees can exchange part of their salary, bonus, or redundancy package for increased workplace pension contributions.
- See how to tell us your employees' pensionable earnings when making salary exchange contributions.
Using salary exchange
Salary exchange (also known as salary sacrifice) is an agreement between you and your employees, where they agree to exchange part of their salary, bonus or even redundancy package for an increased contribution payment to their workplace
pension.
It isn't suitable for all employees, and the employee needs to give permission to make pension contributions this way.
- When submitting a contribution to your auto-enrolment dashboard, you must provide us with the employee's pensionable earnings figure for the contribution period before salary exchange – regardless of which pensionable earnings definition you use.
- Calculate and deduct the employee's salary exchange contribution before income tax and National Insurance have been calculated and add to the employer contribution when submitting the contribution to the auto-enrolment dashboard.
Important information
Because contributions will be submitted as employer only, Royal London won't
claim any tax relief on them.
Salary exchange example
In this example, we’ve assumed pension contributions are based on the pre-exchanged salary, with any tax and National Insurance savings reinvested into the pension.
- Let's assume an employee, Faisal, earns £25,000 and pays basic rate tax. They are exchanging 5% of their salary for
an employer pension contribution. Their employer is contributing a further 3%, totalling 8%. - Faisal 'exchanges' £1,250 (5%) of their gross salary each year for pension contributions. The employer pays these contributions into Faisal's pension on their behalf.
- This means that, for the purposes of tax and National Insurance calculations, the employee salary is now £23,750.
Validation on your auto-enrolment dashboard
If your scheme is set up on a salary exchange basis and includes National Insurance reinvestment, then the contribution validation on the dashboard will only consider the flat-rate employee and employer contributions.
Our system will take into account any changes to National Insurance rates for this type of scheme.
More about making contributions