May 2, 2023

Is Your Business Still Missing Out on Pension Salary Exchange?

The concept of Salary Sacrifice has been around for decades. Despite some significant changes to pensions recently, the use of Salary Sacrifice (or Salary Exchange) in workplace pension schemes shows no signs of stopping.

However, we still come across businesses, on pretty much a daily basis, who are yet to adopt this process.

What is Pension Salary Exchange?

If you’re new to the concept, in simple terms, this is an approved government tax break for both employers and their employees.

Our preference is to use the more modern term of Salary Exchange because it just feels better to ask your employees to exchange part of their salary, than to sacrifice it. And that’s how it works. An employee gives up part of their salary for a non-cash benefit of the same value, like a pension contribution.

What are the benefits of Pension Salary Exchange?

As a result of a salary being lowered in exchange for a pension contribution, both employer and employee pay lower National Insurance Contributions.

Here are some examples of the potential annual savings for employers.

Whilst an employer can obviously just bank this saving, it’s common for some or all of it to be passed on to employees, in the form of additional pension contributions or other benefits that can have a positive impact on their wellbeing.

From an employee’s perspective, they can benefit directly through a National Insurance Saving. An employee earning £40,000 per annum and paying 5% into their workplace pension through Salary Exchange, would be £240 per annum better off in their take-home pay compared to the position if they were not using exchange. That’s worth having and this is particularly true when the cost of living is high. The benefit for higher rate taxpayers is less because they pay a lower rate of National Insurance, but the exchange does mean they get higher rate tax relief immediately, and that is not always the case.

It’s also important to say that not every employee can benefit from Pension Salary Exchange. Not every employee earns enough to pay National Insurance, there are national minimum pay rules for employers to observe, and there are some other factors that need to be brought to the attention of employees when any exchange option is introduced. Education is, therefore, an important part of any implementation process.

Does Salary Exchange affect pension contributions?

The amount of money paid into a pension before and after an exchange is typically the same, unless any Employer National Insurance is rebated back to the employee in the form of an additional pension payment. The main difference is that the total contribution is paid by the employer after exchange, rather than a combination of employer, employee and potentially HMRC as is the case prior to any exchange. The employee has exchanged the amount they were paying in for an equivalent amount paid by their employer.

Is Pension Salary Exchange straightforward to set up?

Generally speaking, yes, it is, but clearly it does depend on the complexity of your business.

There are, however, a number of options and variables as to how Pension Salary Exchange can be set up and ultimately, we’re talking about a change to contracts of employment, so you’re going to need to talk to a lawyer. Payroll processes need to change too. That said, we’ve got experience working with lots of businesses who are successfully still running an exchange offer.

HWWA Consulting can certainly provide you with the guidance and support regarding how to set up and monitor Pension Salary Exchange from an employee benefit perspective, as well as the education necessary to assist your employees in their decision-making process.

If you would like a free consultation to discuss the possibilities for your business, please get in touch >

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