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Salary exchange: adding value to your pension scheme

What is salary exchange? 

You’ve probably heard of salary exchange, sometimes referred to as salary sacrifice, but may not be familiar with what it is. 

Put simply, it’s an agreement between you and your employees, where your employee agrees to exchange part of their gross salary or bonus for a pension contribution. The pension contribution is at least equal to the amount exchanged. And it can be easy to set up.  

What are the advantages? 

The key benefit is that it allows both you and your employees to make a saving. That’s because you both pay less National Insurance contributions (NIC) and employees may pay less income tax. 

Here’s an example of what your NIC savings could look like in the first year:

Number of pension scheme members




Total yearly salary payment before exchange




Total salary exchanged by employees (5%)




Employer NIC rate (2020/21)

x 13.8%

Employers annual NIC saving*




*Figures from Royal London and are based on an average salary of £30,000 per employee and standard automatic enrolment contribution rates of 5% employee contribution and 3% employer contribution.

As you are free to use your savings as you wish, you can easily cover the costs of setting up salary exchange and choose to reinvest some or all in your business or pay more into your employees’ pension plans.   

Your employees benefit from increased pension contributions when NIC savings are added to their pension plan which, longer term, could provide a more comfortable retirement. 

As with all pensions, the value of investments can go down as well as up and your employees may not get back the original amount invested in their plan.

Things to consider 

In some cases, salary exchange might not be suitable for all your employees, for example if they’re on furlough or their salary would drop below the National Minimum Wage after exchange. It can also affect statutory and salary-related benefits which employees need to be aware of.

The next step

For more information, get in touch with Andrew Lloyd-Owen at or via 0161 236 6936.

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