Salary exchange (also known as salary sacrifice) allows you to give up some of your salary so you can claim extra benefits from your employer. It’s a tax-efficient way to make extra contributions to your pension and both you and your employer will pay lower National Insurance Contributions on your reduced salary.
How does salary sacrifice work?
Many employers offer salary exchange schemes, giving staff an opportunity to exchange part of their salary for a non-cash benefit such as childcare vouchers, a bike. It can also be referred to as ‘salary sacrifice’ and one of its most common uses is increasing pension contributions.
A salary exchange pension will result in an increase to your take-home pay.
Sounds great, can everyone do it?
Not all employees will qualify for salary exchange and if you’re on a low wage it may not be possible to reduce your earnings further. Your earnings will need to be more than the national minimum wage after taking advantage of this type of contribution.
It is set up by slightly changing your employment contract with your employer.
Salary exchange and tax
When you give up part of your wages through a salary exchange scheme, you’ll pay less tax and national insurance on your gross earnings. Your employer will also save money as they won’t have to pay Employers’ National Insurance Contributions on the part of your wages that you sacrifice and may pass some or all of these savings on to you.