Your salary exchange responsibilities
Setting up a salary exchange agreement isn’t necessarily complicated, but it can take a number of weeks or months to put in place. A financial adviser and employment law specialist can support you with the following decisions.
1. Understand the basics
Here you'll decide whether to offer salary exchange, and if so, which employees to offer it to.
Can your payroll provider support salary exchange?
The first step is reviewing your payroll system to understand what support it can provide for administering salary exchange. You should consider which reinvestment options your payroll supports, if it can calculate pension contributions, take-home pay and any opt out refunds.
Who can join your salary exchange scheme?
You can offer salary exchange to some or all of your employees. This is as long as it doesn't reduce their take-home pay to less than National Minimum Wage or National Living Wage.
For employees who aren’t eligible, or choose to opt out, you’ll need to make pension contributions on a relief at source basis, after tax has been deducted.
2. Savings options
You and your employees can benefit from salary exchange in a number of ways, depending on how your arrangement is set up. Again your financial adviser can help understand the options.
Will you keep or reinvest your savings?
Decide if you'll either:
- keep all your National Insurance contribution (NIC) savings
- reinvest all your NIC savings into your employees' pension plans
- a bit of both - keep some for you and your business, but also pass some back to your employees.
You should then apply this at scheme level. Keeping all of your NIC savings gives you the option to help reduce your costs and reinvest in your business. Whereas reinvesting some or all of the savings you make back into your employees’ plans, can help increase your scheme take up, and improve your employee benefits package.
If your payroll system isn’t able to calculate any reinvestment automatically, this may increase your administration.
3. Set rules and default options
There are other decisions you'll have to make and your financial adviser will be able to support you exploring these options.
Do you want to set a minimum salary threshold?
Setting a limit can be a simple way of making sure any employees keep their final take home pay above the National Minimum Wage or National Living Wage.
You can find more minimum wage details on the HMRC website (opens a new window).
Will salary exchange be your default option?
You can set salary exchange as the automatic default option for your pension scheme. This means that any new employees will be automatically enrolled into this arrangement.
To do this, it must be written into your employees’ employment contract with an agreement letter or opt-out form.
Be clear about what the arrangement includes
Decide if you want to let your employees exchange just their salaries, or also any contractual bonuses awarded. It won’t change how the scheme is set up, but you’ll need to give your employees a separate letter for contractual bonuses.
Additional support
An employment law specialist can help you ensure your contracts of employment meet legal requirements.
4. Update contracts and payroll
A salary exchange agreement must be detailed in your employment contracts, and your employees must agree to it. If you’re making changes to an existing contract a consultation period may be required to explain the changes. Consultation periods usually last around 30-60 days. You are responsible for setting the appropriate length of time for your business.
Update your employment contracts
You have a legal requirement to update your existing employees’ employment contracts, to make it clear that a salary exchange arrangement is in place.
There are a number of ways to update employment contracts - you can do this with: an agreement letter; a salary exchange opt-out form, or a new contract of employment.
Updating contracts with an agreement letter
The simplest way to update existing employment contracts is with an agreement letter, which can be used to exchange salary or contractual bonuses. You’ll need separate agreement letters for each, and one for every employee.
Both you and your employee need to sign the letter and it should include:
- employee’s name
- salary or bonus details before and after the exchange
- the date the exchange will take effect from and in what circumstances it will end.
Within the letter you can decide if you want to include details about how your employees can opt out of the agreement, and how and when they can end it.
Regardless of whether you include this in the letter or not, you’ll need to have a process in place to minimise opting in and out happening too frequently and the administration work that it would involve.
If an employee has previously opted out of the agreement and wants to opt back in at a later date, you can outline in the letter how they do this - for example, in writing or by email.
Updating contracts with an opt-out form
Alternatively, you can use a salary exchange opt-out form to record requests from employees who don’t want to be included in the salary exchange arrangement. This should contain the same level of detail as an agreement letter.
Update your employee payslips
Employee payslips can be updated to reflect a salary or bonus exchange contribution. This is one way to check that the arrangement details have been set up correctly.
Your employees can choose to opt in or opt out
Although you’ve chosen to offer salary exchange on your scheme, regardless of your scheme’s default, your employees can still decide if they want to opt in or opt out.
You’ll need to make sure you’ve a clear process in place to deal with employees who opt in or out of the arrangement.
If they’re opting out of the salary exchange arrangement but continuing to contribute to their pension, their pension contributions should continue but on the relief at source basis, after tax has been deducted.
Setting up your arrangement with Royal London
Once you’ve completed all of these steps, we're here to help you set up your salary exchange arrangement on your new or existing Royal London workplace pension scheme.
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Adding to your existing scheme
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Setting up a new scheme