Salary Exchange: Pension Savings for You and Your Employees

3 Mar

The Office of National Statistics (ONS) reported that UK inflation is at its highest level in almost 30 years, reaching 5.4% in December 2021, and the cost of living is rising at an alarming rate. To compound these financial challenges, the Bank of England are raising interest rates and from April, National Insurance Contributions (NIC) will increase by 1.25% for both employers and employees.

With the increase in National Insurance looming, it may be a good time for employers to consider introducing Salary Exchange (also known as Salary Sacrifice) as a way to make potential savings for both you and your employees when contributing to their pensions.

Salary Exchange is a concept which was recognised some years ago by Her Majesty’s Revenue and Customs (HMRC) and is operated by many organisations as a tax efficient way of making pension contributions. It works by giving employees the option to agree to a change in their contract of employment and ‘sacrifice’ a proportion of their pay and in return for this reduced salary, they can receive an equivalent increased employer contribution into their pension scheme.

If your employees were to give up an amount of their pay before they would otherwise receive it, they would see a reduction in both their Income Tax and National Insurance Contributions, which in turn makes their pension contributions far more cost-effective.

As the employer, you will see your own savings in the form of reduced Employer National Insurance Contributions as a result of agreeing a reduced salary with your employees. You can either choose to return all of your savings to employees as additional pension contributions or give some of it back. At Thomas Carroll, we’ve seen an increase in employers using this method for freeing up some budget that is then used towards enhancing existing employee benefit offerings.

From 6th April, the amount employers will pay in National Insurance will increase from 13.8% to 15.05% whilst the employees’ Class 1 National Insurance Contributions will increase from 12% to 13.25% and from 2% to 3.25%. Salary Exchange is the most effective way for employers and employees to save together. What’s more – implementing Salary Exchange is straightforward with the right support and guidance.

Salary Exchange Considerations

Despite its cost-saving benefits for most, there are some scenarios where Salary Exchange may not be beneficial for your employees, such as those on National Minimum Wage as it can potentially impact an employee’s state benefits. It can also affect pension contributions during maternity leave.

Thomas Carroll Employee Benefits can analyse and produce a detailed report highlighting the employees that will not gain from Salary Exchange. Furthermore, we can produce individual member statements detailing if and how your employees can benefit, for you to share with them.

Need Advice?

If you are interested in setting up Salary Exchange for your business, our experienced team will help you manage the project seamlessly, from start to finish. If you have any questions or would like further information, please contact us on 02920 858611 or at for a no obligation conversation.