Salary exchange: tax savings for you, a pension boost for your employees

Did you know there is a tax-efficient approach to contribute to your workers’ pension plans that might result in considerable financial savings for you as an employer?

A salary exchange (also known as a salary sacrifice) is a formal agreement to amend the terms of an employee’s contract. The employee agrees to a pay decrease in return for increased company pension contributions. Because they are not paying tax and national insurance (NI) on the amount of their salary that has been swapped, the employee’s take-home pay will, ultimately, increase.

You will also make employer’s NI savings on the pay amount swapped, as the programme takes advantage of tax breaks for employer pension contributions while having no negative impact on payments to the employee’s pension pool.

To make this completely clear, imagine the following scenario. Your employee and you both contribute 5% of their salary into their company pension. They agree to take a 5% pay cut, and now they continue to pay 5% while you pay 10%. This is better for them (it increases their overall take home as pension contributions are un-taxed). And it is better for you (as you will make NI savings on the amount of compensation changed from salary into pension contribution).

If you do not already have a salary exchange program, you should consider it

It makes sense for the vast majority of companies and it will benefit your bottom line. The UK’s biggest employers are definitely operating their pension schemes through salary exchange, and gaining an additional competitive advantage over smaller rivals in doing so.

The applicable savings apply to employers of any size, and therefore represent one area where you can quickly and easily close a competitive gap. Setting up a salary exchange pension scheme is not expensive, and it will pay for itself in a short amount of time, so if you’re not currently operating such a scheme, we strongly suggest you contact us to learn more about it.

If you would like to explore setting up a salary exchange pensions scheme – then contact JW Hinks on 0121 456 0190. Our experienced team of professionals can help to ensure your pension scheme is as tax efficient as possible, and stays within HMRC’s regulations.