Saving with salary exchange
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 (NIC’s).
- Your employees save NIC’s and will save on tax.
- You can choose to keep any 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.
- Your employees can benefit from a bigger retirement fund, if NIC savings are reinvested back into their plan.
- 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 NI contributions 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 (2022/23) | x 13.8% | ||
| Employers annual NIC saving* | £10,350 | £20,700 | £103,500 |
*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.
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 | £25,411 | £55,000 | £52,155 |
| Employee | ||||
| Pension contribution | £1,080 | £0 | £2,750 | £0 |
| Income tax payment | £2,886 | £2,568 | £8,882 | £8,294 |
| NIC | £1,731 | £1,541 | £4,618 | £4,561 |
| Employer | ||||
| Pension contribution | £810 | £2,617 | £1,650 | £4,887 |
| NIC | £2,470 | £2,251 | £6,334 | £5,941 |
| Outcome | ||||
| Employee take home pay | £21,302 | £21,302 | £39,299 | £39,299 |
| Total pension contributions | £2,160 | £2,617 | £4,400 | £4,887 |
| Cost to employer (including salary) | £30,280 | £30,280 | £62,984 | £62,984 |
All figures are based on tax and NI rates for the 2022/23 tax year and rounded down to the nearest £. These figures have been updated to reflect the NI Rate Changes in November 2022.
| 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 | £1,731 | £1,569 | £4,618 | £4,563 |
| Employer | ||||
| Pension contribution | £810 | £2,160 | £1,650 | £4,400 |
| NIC | £2,470 | £2,283 | £6,334 | £5,954 |
| Outcome | ||||
| Employee take home pay | £21,302 | £21,464 | £39,299 | £39,354 |
| Total pension contributions | £2,160 | £2,160 | £4,400 | £4,400 |
| Cost to employer (including salary) | £30,280 | £30,093 | £62,984 | £62,604 |
All figures are based on tax and NI rates for the 2022/23 tax year and rounded down to the nearest £. These figures have been updated to reflect the NI Rate Changes in November 2022.
NI savings are added to your employees take home pay. This is reflected in their exchanged salary amount, which is slightly higher than the exchanged salary where savings are paid into their pension plan.
Things to consider
- Salary exchange may not be suitable for employees on furlough, as you can’t claim the exchanged portion of their salary through the Job Retention Scheme.
- 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 more than £240,000 with a tapered annual allowance. If this applies to any of your employees, 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 can 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.
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.
Setting up your salary exchange arrangement
To help ensure your salary exchange arrangement is set up correctly, we've detailed some things you need to think about, and the decisions you'll need to make in our Getting you set up for salary exchange guide.
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.
To give you that extra bit of support, you’ll have an implementation manager who’ll make setting up your new scheme or moving your existing scheme easy. Within just a few steps, your scheme will be up and running and they’ll provide all the training you need on our online systems, to run your scheme yourself, using our employer online service.
You can use our calculator to produce statements, detailing total savings, pension contributions and take-home pay for each of your employees.
Your dedicated scheme owner will then take over and keep a watchful eye on your scheme to make sure it’s running exactly as it should.
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:
- A salary exchange calculator
- An employee guide to salary exchange (increased pension contribution)
- An employee guide to salary exchange (increased take home pay)
- Employee awareness posters and postcards
- Employee awareness email template.
Useful links
- Salary sacrifice and the effect on State benefits
- National Minimum Wage
- HMRC's Q & A
- HMRC information on salary sacrifice
Further information
For more information about salary exchange speak to your financial adviser.