Are you looking for a simple way to improve your employees’ benefits package and save money at the same time? If so, introducing a salary exchange arrangement to your pension scheme could help you do this.

What is salary exchange?

You’ve probably heard of salary exchange, sometimes referred to as salary sacrifice, but may not be familiar with what it is.

Put simply, it’s an agreement between you and your employees, where your employee agrees to exchange part of their gross salary or bonus for a pension contribution. The pension contribution is at least equal to the amount exchanged. And it can be easy to set up.

What are the advantages?

The key benefit is it allows both you and your employees to make a saving. That’s because you both pay less National Insurance contributions (NIC) and employees may pay less income tax.

Here’s an example of what your NIC savings could look like in the first year:

*Figures from Royal London and are based on an average salary of £30,000 per employee and standard automatic enrolment contribution rates of 5% employee contribution and 3% employer contribution.


As you’re free to use your savings as you wish, you can easily cover the costs of setting up salary exchange and choose to reinvest some or all in your business or pay more into your employees’ pension plans.

Your employees benefit from increased pension contributions when NIC savings are added to their pension plan which, longer-term, could provide a more comfortable retirement.

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.

Things to consider

In some cases, salary exchange might not be suitable for all your employees, for example, if they’re on furlough or their salary would drop below the National Minimum Wage after exchange. It can also affect statutory and salary-related benefits which employees need to be aware of.

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
The Financial Conduct Authority does not regulate Tax Advice, Estate Planning or Will Writing.
The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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