Salary Exchange

What is salary exchange?

Salary exchange is an agreement between an employee and their employer, which results in both paying less National Insurance contributions. We can support this option in our new and existing Group Personal Pension (GPP) and Group Stakeholder Pension [GSHP] schemes and tailor it to suit the needs of your clients to make their scheme cost-effective and attractive.

The employee agrees to exchange part of their gross (before tax) salary in return for a non-cash benefit, like a pension contribution.

Because the salary is being exchanged rather than paid directly, both employer and employee pay less in National Insurance contributions.

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How does it work?

  • The employee opts-in to the salary exchange agreement. This involves an amendment to their terms and conditions of employment.
  • The employee will choose an amount of money to exchange and their gross salary is then reduced by this amount:
    • if an employee earns £25,000 each year and chooses to exchange £2,500, their salary would become £22,500. The exchanged amount is then paid direct to their pension plan as an employer contribution.
  • Clear communication is essential if a salary exchange arrangement is to be successful. To help, we’ve produced literature for employers and employees on how salary exchange works and how it can impact and benefit them.
  • Our Salary Exchange calculator can demonstrate how salary exchange works and provides a variety of individual and bulk calculations and outputs.

What about smart pension schemes?

The basic principle of the employee giving up part of their gross salary in exchange for a non-cash benefit doesn’t change with a smart pension scheme; but the sign up method is different.

Rather than obtaining separate agreement from each employee to go ahead with their exchange, smart pension schemes instead rely on employees who do not wish to participate to opt out of the proposed exchange.

Employers would communicate to their work force, advising them that the proposed salary exchange will take effect from a specified date (this date must be in the future).

Any employees who do not wish to take part must actively opt-out. The employer must ensure that employees are given plenty of time to make their decision. Scottish Widows recommend a minimum of 4-8 weeks’ notice.

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