Salary Exchange can be used for benefits such as childcare vouchers, cycle to work schemes, health screenings and mobile phones, but the greatest potential saving can be made in connection with pension contributions. Salary exchange involves employees agreeing to take a lower salary in return for a pension contribution. Because the salary is lower, national insurance contributions (NICs) payable by both employer and employee are reduced and both parties can also put some, or all, of what they have saved in NICs towards making additional pension contributions. Alternatively the employer can use their savings to fund additional employee benefits.
A simple pension example
An employee earning £28,000 a year decides to exchange £1,500 of salary an extra employer pension contribution of £1,500. Take-home pay, after tax, National Insurance and employee’s own pension contributions, falls from £20,452 to £19,492. But the value of the total take-home package including the employer pension contribution has increased from £20,452 to £20,992. This means the employee is better off by £540 a year.
Higher rate taxpayers will make even larger savings. Salary Exchange allows the higher rate taxpayer to immediately increase the value of each personal contribution by 37.9%. This could be viewed as obtaining an immediate investment return of 37.9% on every contribution made. For basic rate taxpayers the increase to the value of each contribution is 17.65%. This combined with the advice and education surrounding fund choice form two key elements of our corporate proposition.
Radcliffe & Newlands has in-depth knowledge and experience in dealing with Salary Exchange and is able to provide assistance and communication when implementing this benefit.
Things to consider
Sacrificing part of a salary means earning less and this might affect maternity pay as well as mortgage applications.
Lower earnings may also affect the State Pension as well as other contribution-based state benefits such as Jobseeker’s Allowance and Employment and Support Allowance. On the other hand, any claim for tax credits may increase.
Because salary is lower as a result of salary sacrifice, any life cover through a scheme at work could be less if it’s based on post-salary sacrifice level.
Salary exchange is not permitted if, as a result, it would mean that the employee earns less than the National Minimum Wage.