Salary Exchange is exactly what it sounds like – an agreement by an employee to exchange some of their salary for a non-cash benefit. Typically, this might be in the form of Childcare Vouchers or Cycle to Work schemes, but perhaps the most tax advantageous for both employers and employees is when it is used in making employee pension contributions.
Using Salary Exchange means that both the employee and the employer pay less National Insurance Contributions (NIC) on the reduced salary. The NIC savings the employer makes can then be used in many ways: to enhance the benefits package, to increase pension contributions, to shore up deficits in an occupational pension scheme, or to simply keep the savings for increased costs of employment.
When it is used to maximise pension contributions, the 13.8% employer saving is simply added to the amount already being paid each month for employees. Typically, we have seen employers rebate either 100% or 50% of their saving, but the choice is theirs to make.
It is also a win-win situation for employees as they won’t pay NI on the amount sacrificed (either 2% or 12% depending on earnings*), so they have the option to: increase their contributions with no impact on take-home pay, thereby potentially increasing the size of their retirement fund; or they can keep the same level of pension contribution whilst boosting take-home pay.
A further significant advantage of salary exchange is for higher rate and additional rate tax payers. This is because as the full pension contribution is now being made by the employer, employees no longer have to claim back the extra tax relief due through their tax return, therefore meaning that they receive the immediate benefit.
*An employee’s earnings between £8,632 and £50,000 are subject to 12% NIC, and all earnings above £50,000 are subject to 2% NIC (2019/20 tax year).
Aston Lark has a specialist employee benefits team, who would be happy to guide you through this and any other pension queries you may have. Please contact the Aston Lark Employee Benefits team on 0207 543 2833 or email [email protected].
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