Workplace Salary Exchange Schemes

Workplace Salary Exchange Schemes: A Smart Way to Contribute to Your Workplace Pension

With increasing financial pressures on both businesses and individuals, more employers and employees are turning to Salary Exchange (also known as Salary Sacrifice) as a smarter way to contribute to workplace schemes such as pensions. These arrangements can offer significant financial benefits to both parties, making them a win–win option when implemented correctly.

What is Salary Exchange?

Salary Exchange is an alternative method of paying into your workplace pension. Instead of the employee making contributions from their salary after tax and National Insurance (NI) have been deducted, they agree to reduce their gross salary by the amount they would usually contribute. The employer then pays this amount directly into the pension scheme on the employee’s behalf, alongside any employer contributions already agreed.

What are the Benefits?

• For the employee: Because your gross salary is reduced, you pay less National Insurance. The total contribution to your pension remains the same, but your take-home pay could increase slightly due to the NI savings.
• For the employer: Employers also pay less National Insurance because the employee’s salary is lower. These savings can be reinvested in the business or used to enhance employee benefits.

How Does It Work?

1. The employee and employer agree to reduce the employee’s gross salary by the value of their pension contribution.
2. The employer pays this amount directly into the pension scheme on the employee’s behalf.
3. This means all pension contributions are made by the employer, though the value comes from both the employee and employer contributions combined.
4. The employee benefits from reduced National Insurance contributions, and their pension pot continues to grow as normal.

Who Can Benefit?

Salary Exchange is most beneficial to employees who pay National Insurance. Salary Exchange may not be appropriate or advantageous for employees earning close to the minimum wage or those not paying NI (such as those over State Pension age).

Important Considerations

Moving to a Salary Exchange arrangement involves a change to your contractual pay, so it’s essential to carry out a formal consultation and ensure employees understand the implications. A written agreement must be in place to reflect this variation to contract.