Last year’s Autumn Budget threw a curveball to employers across all sectors with big changes to National Insurance (NI). The changes announced by the Chancellor included an increase in employer National Insurance Contributions (NIC) from 13.8% to 15% and a significant reduction in the secondary threshold (the point at which employers begin paying NI) from £9,100 to £5,000. With the tax year-end just around the corner, many businesses are figuring out how these changes will affect their operations and budgets.
But there is some positive news. A key opportunity employers should seriously explore is using pension salary exchange (or salary sacrifice, as it’s sometimes known) arrangements. Under the traditional setup, employees contribute to pensions from their net earnings (after tax) but with salary exchange employees agree to take a lower gross salary in return for boosted pension contributions, which is handled by their employer. This swap means employees pay less Income Tax and NI, leaving both the employer and employee better off.
Why does this matter to businesses?
As a business owner, you’ll know that happy employees usually equal better performance. People who feel appreciated and financially secure tend to work harder, stay engaged, and even take fewer sick days.
Offering a competitive financial package goes a long way in encouraging that happiness. Rate of pay is normally, though not always, an employee’s main concern but don’t underestimate the importance of your workplace pension scheme as an attractive benefit.
If you haven’t already explored salary exchange for pensions, here are some reasons to take a closer look.
You can reduce your employees’ Income Tax and NI contributions
Salary exchange allows employees to trade a portion of their pay for a non-cash benefit, most commonly pension contributions.
By exchanging part of their salary, employees reduce their taxable income, which in turn lowers the amount of Income Tax and NI they pay. The exchanged amount is then contributed directly to their pension, helping them save more efficiently for retirement.
High earners could take home more despite ‘exchanging’ salary
Salary exchange benefits employees across all income levels but offers significant advantages for high earners.
For those paying higher rates of NI and Income Tax, the tax savings from exchanging part of their salary into a tax-efficient pension could outweigh the reduction in gross pay. This could even result in a higher take-home pay, providing an extra incentive for senior staff.
You also save on NI contributions
Salary exchange doesn’t just benefit employees, it can also save your business money.
When employees reduce their gross pay, your company’s NIC’s decrease too. Encouraging your team, especially high earners, to take advantage of salary exchange can unlock substantial savings.
For example, one of our new clients recently made salary exchange the default contribution method for their workplace pension scheme based on our advice. The result was the employer saving £29,256 annually in NICs on approximately £212,000 of employee gross contributions. And with the employer NIC rate increasing from 13.8% to 15%, those savings are projected to climb to £31,800 per year.
This is a clear example of how salary exchange arrangements can deliver significant financial benefits for businesses. What businesses choose to do with the savings is up to them, but some choose to pay some or all back to benefit their employees.
It can enhance recruitment and retention
The Covid pandemic has reshaped priorities for many employees, putting a greater focus on work-life balance, mental health, and financial security. Including salary exchange in your benefits package could make it more attractive and is a great way to show your commitment to supporting employees’ financial wellbeing.
This not only helps retain your current team but also makes your business more appealing to top talent. Happier and more financially secure employees tend to be more engaged and productive.
Some considerations
While salary exchange offers plenty of benefits, it’s worth being aware that it might not be ideal for all employees. For instance, a reduced salary might affect eligibility for means-tested benefits. Similarly, a lower salary could impact mortgage affordability assessments, though many lenders will be prepared to use the ‘pre-exchange salary’ when calculating the amount they are prepared to lend.
Clear and open communication will help your employees understand the benefits and any potential drawbacks of salary exchange, so they can make informed decisions about whether it’s right for them.
When done right, salary exchange can help you build a loyal, motivated and financially secure team, while also saving money for your business. It’s a win-win for everyone.
