Help your clients save with salary exchange
Salary exchange is a great way to help employers improve their employee benefits package and save money, while generating additional revenue for yourself.
It's a simple, tax efficient way to save into a pension scheme, and offers benefits to employers and their employees.
What is salary exchange?
It's an agreement between an employer, and their employees, where the employee agrees to exchange part of their salary, bonus or even redundancy package for an increased employer pension contribution.
It works in the same way as other salary related benefit schemes, for example company car, cycle to work and childcare vouchers schemes, and it can be easy to set up.
What are the advantages?
- Employers save on NI contributions
- Employees save on tax and NI contributions
- Employers can reinvest any NIC savings in their business or their employees’ pension plans
- Employees receive a higher pension contribution or take-home pay, depending on how the arrangement’s set up
- Employees can benefit from a bigger retirement fund, if NIC savings are reinvested back into their plan.
Things to consider
- Salary exchange may not be suitable for employees on furlough, as employers can’t claim the exchanged portion of their salary
- Employers can’t offer it to their employee if their salary will drop below the National Minimum Wage (NMW) after the exchange
- It may not be suitable for employees earning more than £240,000 with a tapered annual allowance. If this does apply, employees 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.
No one knows what the future holds. If any of your clients find they need to reduce their staff levels they can offer their employees the option to exchange part of their redundancy package too.
How much can employers save?
The amount an employer can save will depend on the size of their workplace pension scheme, and the value of salary exchanged.
The examples below show how much NI contributions can be saved by introducing salary exchange and keeping all of the savings.
|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)||x13.8%|
|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.
How we can help
We’ve produced a suite of materials to help you engage with employers and help them understand the long-term benefits of salary exchange. These include:
- An employer guide introducing salary exchange (PDF). This explains how salary exchange works and includes examples of the benefits and savings at employer and employee level
- An employer guide to setting up salary exchange (PDF). Detailing key considerations for employers when setting up their arrangement
- A salary exchange calculator. You can use this to illustrate benefits and savings at employee level
- An employee guide to salary exchange (PDF) (increased take home pay)
- An employee guide to salary exchange (PDF) (increased pension contribution)
We can also produce group level calculations to help demonstrate employer level savings. Speak to your usual Royal London contact.
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Salary sacrifice and the effect on State benefit