Return Of A Perennial Favourite

It’s been a while since I have written about Salary Exchange, and I couldn’t come up with any better ideas, so here we go again. But this time with added relevance!

Statutory minimum pension contributions have gone up (and aren’t planned to go any higher) and many employees are now required to pay a 5% personal contribution to get anything from their employer. This means the savings that can be made via Salary Exchange are now higher than they ever were.

But, before I delve into that, let me just remind you of what Salary Exchange is.

ABC Ltd. employ Fred and pay him £20,000 a year. ABC have opted for the minimum statutory contributions so Fred needs to pay £1,000 a year to get ABC’s £600.

Operating on a traditional non-Salary Exchange basis, ABC will pay National Insurance on Fred’s salary and Fred will have to pay Income Tax and National Insurance (NI). Looking purely at the pension contribution, it will cost ABC £1,138 to pay him £1,000 and Fred will pay £200 Income Tax and £120 NI. Fred will get the tax back when the money goes into his pension but he won’t get the NI back.

With Salary Exchange, Fred agrees that, rather then be paid the pension contribution, ABC take it over and pay it direct into his plan. This means neither ABC nor Fred pay the tax or NI as they would have done in the non-Salary Exchange scenario. So, ABC are £138 a year better off and Fred has an extra £10 a month in his take home pay, both due to the lower NI.

Multiply the employer saving by the number of staff and the numbers soon mount up. And employees are happy because they have the same amount going into their pension whilst, at the same time, having more take home pay.

So what do ABC do with their NI saving? The simple answer is, whatever they like! They can keep it; they can give some or all of it back to staff by way of an increased pension contribution; they could add another benefit e.g. Group Life Assurance, paid for by the savings.

But is it legal? Again, a simple answer – yes! Government and HMRC are fully aware of it and are happy provided it is used only in the right circumstances, pension contributions being one. And not forgetting this is effectively the way pension contributions are paid in the public sector – NHS, Civil service, local Authority, education, armed forces, police etc. So ABC aren’t being “clever” in a pushing the words and spirit of the law kind of “clever”.

Salary Exchange won’t benefit everyone. People above State Pension Age don’t pay NI so there is no personal advantage to them although the employer will still save. And non-taxpayers will definitely be worse off because they won’t have tax relief added to their contribution. But for everyone else, it’s win-win.

Like many things, Salary Exchange won’t be bought; it needs to be sold. Tell your staff you’re introducing Salary Exchange and inviting them to participate will be met with a wave of indifference from most and downright anger from some who just see the pay cut. Salary Exchange needs explanation and demonstrations of actual real-life effects. So, for ABC, part of their first year saving is likely to go in costs associated with setting up Salary Exchange – presentations, 1-1 meetings, production of statutory letters and other documentation – but they are still likely to save money initially and this saving will go on year after year.

So, what are you waiting for? Salary Exchange is the biggest growth area in pensions at the moment and if you don’t have it, your competitors almost certainly will (or be thinking of introducing it). And by demonstrating to your staff that you can increase their take home pay without affecting their benefits, they can only be grateful.

For an initial discussion on salary exchange, call us on 0333 241 3350 or email us at

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.


Peter Murphy Dip PFS

Benefits Adviser