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Saving with salary exchange

A salary exchange arrangement on your workplace pension scheme could help save money and improve the benefits package you offer your employees.

What is salary exchange?

Salary exchange 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 employer contribution payment to their workplace pension.

It works in the same way as other salary related benefit schemes, for example company car, cycle to work and childcare vouchers schemes and can be easy to set up.

What are the advantages?

  • You save on National Insurance contributions (NICs).
  • Your employees save NICs and will save on income tax.
  • You can choose to keep any employer NIC savings or reinvest them into your employees' pension plans.
  • Your salary exchange arrangement can be set up to give your employees a higher pension contribution or take-home pay.
  • There’s no increased pension contribution cost.

As with all pensions the value of investments can go down as well as up, and your employees may not get back the original amount invested in their plan.

Salary exchange in practice

We've provided some examples below to show how salary exchange could benefit you and your employees.

Scheme level

The amount you can save will depend on the size of your workplace pension scheme, and the value of salary exchanged.

The examples below highlight how much NIC can be saved by introducing salary exchange and keeping all the savings. Your adviser can help you calculate what your savings will be if you choose to introduce this arrangement.

Number of pension scheme members 50 100 500
Total yearly salary payment before exchange £1,500,000 £3,000,000 £15,000,000
Total salary exchanged by employees (5%) £75,000 £150,000 £750,000
Employer NIC rate (2025/26) x 15%
Employers annual NIC saving* £11,250  £22,500 £112,500


*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. Figures are rounded down to the nearest £.

Employee level

The following examples look at the costs, savings and benefits if you choose to reinvest all savings, or no savings in your employees' pension plans.

We've based these on salaries for basic rate and higher rate taxpayers, and standard Automatic Enrolment (AE) contribution rates of 3% employer and 5% employee. Higher level pension contributions will provide higher NI and income tax savings.

  Before salary exchange After salary exchange Before salary exchange After salary exchange
Salary £27,000 £25,500 £55,000 £52,155.17
Employee        
Pension contribution* £1,080 £0 £2,200 £0
Income tax payment £2,886 £2,586 £8,882 £8294.07
NIC £1,154.40 £1,034.40 £3,110.60 £3,053.70
Employer        
Pension contribution £810 £2,535 £1,650 £4,921.55
NIC £3,300 £3,075 £7,500 £7,073.28
Outcome        
Employee take home pay £21,879.60 £21,879.60 £40,807.40 £40,807.40
Total pension contributions £2,160 £2,535 £4,400 £4,921.55
Cost to employer (including salary) £31,110 £31,110 £64,150 £64,150

*Employee pension contribution figures are net of basic rate tax relief.

  Before salary exchange After salary exchange Before salary exchange After salary exchange
Salary £27,000 £25,650 £55,000 £52,250
Employee

Pension contribution*

 £1,080 £0 £2,200 £0
Income tax payment £2,886 £2,616 £8,882 £8,332
NIC £1,154.40 £1,046.40 £3,110.60 £3,055.60
Employer
Pension contribution £810 £2,160 £1,650 £4,400
NIC £3,300 £3,097.50 £7,500 £7,087.50
Outcome
Employee take home pay £21,879.60 £21,987.60 £40,807.40 £40,862.40
Total pension contributions £2,160 £2,160 £4,400 £4,400
Cost to employer (including salary) £31,110 £30,907.50 £64,150 £63,757.50

*Employee pension contribution figures are net of basic rate tax relief.

NI savings are added to your employees take home pay. This means their take home pay is slightly higher than the exchanged salary in example 1, where savings are paid into their pension plan.

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. For example, all employee savings are invested into their pension plan.
  • 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 around £200,000 or more. A salary exchange agreement could trigger the tapered annual allowance and they could incur additional annual allowance tax charges.
  • Your employees' yearly pre-tax salaries will reduce by agreeing to salary exchange. This can affect their entitlement to things such as statutory and salary related benefits.
    In the past this may also have impacted the amount they could borrow in terms of a mortgage or loan. These days most lenders will calculate lending based on the notional salary – their salary before the exchange.
  • As tax treatment depends on your employees circumstances, and could change in future, the level of savings could change in line with this.
    Salary exchange may not be suitable for everyone. We recommend you get professional advice if you need more information.

Bonus Exchange

If your workplace pension is set up under a salary exchange agreement, you can give your employees the option to exchange all or part of any contractual bonus they receive for a pension contribution.

Redundancy exchange

No one knows what the future holds. If you find that you need to reduce your staff levels you can offer your employees the option to exchange part of their redundancy package too. 

To view this information in a printable format, download our employer guide to salary exchange (PDF) (opens in new window).

Setting up salary exchange

To help ensure your salary exchange arrangement is set up correctly, we've detailed the things you need to think about, and the decisions you'll need to make.


More about setting up salary exchange  More about setting up salary exchange

We'll work closely with you and your adviser to set up your arrangement on your workplace pension scheme and get your employees on board.

We'll also provide a suite of member engagement materials that you can share with your employees to help them understand the long-term value of salary exchange.

These include:

 

Useful links to external sites

We do not take responsibility for content provided by external sites. Links open in a new window.

 

Further information

For more information about salary exchange speak to your financial adviser.