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.