In light of the increase to Employers’ National Insurance (NI) contributions, we’re seeing more businesses looking for cost-effective strategies to mitigate the impact, while still being mindful of the need to maintain their competitive employee benefits.
Salary Exchange is one solution that benefits everyone. By allowing employees to trade a portion of their salary for non-cash benefits (such as pension contributions), you can cut your NI bill and even increase employee retirement funds.
Sounds too good to be true? Here’s a closer look at how making a simple change to your pension scheme could boost your bottom line.
What Are Salary Exchange Pensions?
A Salary Exchange Workplace Pension lets employees trade part of their gross salary for pension contributions, offering significant tax savings for both employers and staff.
Unlike traditional workplace pensions (using Net Pay or Relief at Source tax relief methods), Salary Exchange reduces employees’ gross income directly, cutting both Income Tax and NI liabilities. Your business must still contribute at least 3% of qualifying earnings (minimum of 8% total including employee contributions).
If you haven’t considered it before, now’s the time. Almost half of UK employees want to know more about the potential tax savings that come with Salary Exchange Pensions, according to Drewberry’s latest survey.
How Does It Work?
Salary Exchange Pensions can be operated in one of two ways: SMART and Simple, each offering unique benefits.
Simple Salary Exchange: Employees see their NI savings added to their take-home pay. This gives them a higher monthly income while still benefiting from tax savings.
SMART Salary Exchange: NI savings are redirected into employees’ pension pots, boosting their retirement funds rather than their monthly income.
You can choose the option which best aligns with the financial goals of your team and your business. You’ll also need to check if your payroll provider can support SMART Salary Exchange.
What Kind Of Savings Can You Make?
It’s not just employees who can save, you as an employer can too. Let’s say you have an employee earning £40,000 a year who decides to exchange £4,000 of their salary for pension contributions. Here’s how it would break down:
Pre-salary exchange pension | Post-salary exchange | |
Amount exchanged | £0 | £4,000 |
Gross salary | £40,000 | £36,000 |
Salary above £5k threshold | £35,000 | £31,000 |
Employer NI (15%) | £5,250 | £4,650 |
£600 annual saving per employee |
Is Salary Exchange Right For Your Business?
Almost any employer can run a Salary Exchange Workplace Pension. It’s a highly flexible offering that boasts a number of benefits for both you and your team.
Why It’s Great For You
- Lower NI contributions
The big one. By reducing employees’ gross salaries, employers pay less National Insurance. Savings can be reinvested, added to pensions, or used to offset other benefits
- Boosted remuneration
Offering a Salary Exchange pension shows flexibility and commitment to employees’ financial futures, helping retain and attract talent
- Tax benefits
Pension contributions qualify as an allowable expense, reducing corporation tax bills.
Why It’s Great For Employees
- Boost pension savings
National Insurance savings can be added directly to pension pots, growing the value of employees’ pensions faster
- Pay less tax
Lower taxable income means employees pay less Income Tax and National Insurance. Basic-rate taxpayers can save up to 32%, with higher-rate taxpayers saving up to 22%.
- Increase take-home pay
Salary Exchange arrangements may also increase take-home pay, depending on how NI savings are handled.
When It May Not Be Suitable
While Salary Exchange pensions offer many benefits, there are some challenges to consider. You’ll need to weigh up the following factors when considering a scheme:
- High earners may face issues with tapered annual allowances, potentially leading to tax penalties.
- Loan and credit applications can be impacted, as salary sacrifice lowers taxable income.
- Other earnings-related benefits like maternity pay and state benefits may be affected.
While there’s a lot of admin to deal with, a Salary Exchange pension scheme will work in much the same way as a regular one once it’s set up. And with the right partner to manage the process, you can avoid the headaches that come with pensions admin.
It’s always worth working with an employee benefits consultant (like the Drewberry experts) who’ll take the time to learn about your business and find the right scheme for your needs.
Getting Employee Buy-In
The benefits of Salary Exchange for employees speak for themselves: lowering tax bills while getting something in return is a huge win. But employees may be unaware or even sceptical of the advantages.
That’s where your communication game needs to be strong. Getting employees excited about Salary Exchange is all about clarity and showcasing the benefits.
Drewberry’s latest pensions survey found that almost half of UK employees want to know more about salary exchange sacrifice and the potential tax savings that come with it.
Plus, the same survey found that 66% want more education on pensions in general from their employer, so it’s worth starting those conversations with your team – breaking down the complexities and finding out what people truly value
Exchange Worry For Workplace Pensions
Have you implemented a Salary Exchange Pension scheme in your business? Are you thinking about it in light of the changes?
There’s lots to consider before you jump in: your budget, your team’s priority and your employee engagement strategy will all affect which scheme is right for your people and your business. Not to mention ensuring your scheme is compliant and structured in a way that maximises benefits while adhering to HMRC guidelines.
The Drewberry experts handle all the heavy lifting for you: from finding the right scheme, rolling it out to employees, and measuring its performance. We’ll ensure everything’s compliant, making adjustments where needed based on employee feedback and changing tax regulations. Call 02074425880 or email help@drewberry.co.uk to get started.
www.drewberryinsurance.co.uk