Salary Sacrifice or Salary Exchange is an arrangement between the employer and the employee, where the employee agrees to give up a portion of their salary for a non-cash benefit. A non-cash benefit could include an electric car, a bike, employer-provided childcare among other benefits. Most people sacrifice their salary for pension contributions.
The portion they agree to give up never goes below National Minimum Wage.
A salary sacrifice scheme is generally a tax-efficient way of contributing to your pension.
How Salary Sacrifice works
The employee’s contract of employment needs to be amended or a side letter signed so that both employee and employer are fully compliant.
This agreement works in a very tax-efficient way both for the employer and the employee.
This is because the lower the income the employee earns, the less National Insurance contributions they pay – which also applies to the employer too.
Let’s look at an example.
Luke is currently auto-enrolled in a workplace pension scheme, without a salary sacrifice agreement.
- He earns £30K per year.
- He contributes the usual 5% of his earnings to his pension, which would be £1,500.
- His employer contributes the minimum 3% of his earnings to his pension, which would be £900.
Luke and his employer decide to switch to a Salary Sacrifice scheme. This would mean that Luke accepts to give up a portion of his salary. Luke accepts to reduce his gross yearly salary by £1,500, and add this 5% straight to his pension pot as before.
This means that now Luke:
- earns £28,500 per year
- contributes £1,500 in his pension as before
- has lower NIC since his gross salary was reduced, saving him £180
- The employer pays lower NICs too, saving £207 annually – which they can choose to reinvest it in the company or add it to the employee’s pension pot.
By reducing the salary, National Insurance contributions lower, saving money both for the employer and the employee.
Whether you’re an employer or employee, you can use Husky’s calculator to determine how much you’ll be saving on pension too.
What are the advantages of Salary Exchange?
Apart from the obvious reason of saving money by reducing tax, there are more good things coming from a move to the Salary Exchange pension scheme.
Boosted pension pot
As explained earlier, both the employee and the employer save money in a scheme like this one, as their NICs are lower.
Some employers choose to reinvest these savings in the company, while others choose to add it to their employees’ pension pot, boosting the overall amount for their retirement. The employer might pay part or all the savings to the pot, increasing the amount.
Reduced tax
Saving more happens when the gross salary is slightly lower. The employee and employer pay less National Insurance contributions based on lower earnings.
Employees get tax relief straight away
Some employees (higher rate taxpayers) get their tax relief on their pensions immediately and do not have to claim their additional tax relief through their tax return. In a salary exchange scheme, high taxpayers don’t need to claim that extra 20% tax anymore because tax relief is automatic during payroll.
Boosted business savings
It’s not only the employee that saves money from such a move to a Salary Sacrifice scheme. Before the agreement, the employer had to pay both for NIC and for a workplace pension for each of their employees but with Salary Sacrifice they save too.
It’s the employer’s decision on how they invest the company’s savings from a Salary Sacrifice scheme. It could be invested in the company for long-term growth or added to the employees pension. Use Husky’s calculator and determine how much you can save too.
Increased employee satisfaction
Happy employees, happy customers, more productivity.
By applying Salary Exchange, employees automatically get more on their NET pay, increasing employee satisfaction. When the employer adds the company’s savings to their pension pots, it shows appreciation for their hard work.
There’s high regard for the employer and more respect towards the employees. Think of it this way: people enjoy working in a workplace a lot more when they feel valued, and therefore work even harder.
Non-cash benefit alternatives
A pension is not the only option when it comes to a Salary Sacrifice agreement. It’s a non-cash benefit after all.
With your employer you could agree on:
- Childcare provided by your employer
- Low emission vehicles
- A bicycle
- and many more, depending on what’s on offer from the company.
Husky can help you transition
We are here for our customers to make their transition to a Salary Exchange pension scheme easier.
We make the entire process seamless through automation. Our automated workflow for employment contract amendment and the Husky app make the implementation of Salary Sacrifice a simple task.
We ensure that the transition and the monthly administration is fully compliant, the paperwork and contracts are accurate, and that both employee and employer will positively benefit from a pension scheme such as this one.
Get started with Husky today.
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We setup and manage your pensions, payroll, and salary exchange—all in one place, ensuring compliance every step of the way.
