Is Salary Exchange Still Worthwhile?

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Is Salary Exchange Still Worthwhile?

Recent research conducted by Workplace Pensions Direct (WPD) and YouGov suggests that approximately 50% of UK employers utilise pension salary exchange (also known as salary sacrifice) with numbers likely to grow. But given the reduction in the main rate of employee Class 1 National Insurance (NI) contributions from 12% to 10% from 6th January 2024, is salary exchange still worthwhile implementing?

Pension salary exchange enables employees to contractually exchange part of their salary for a non-cash benefit from their employer, such as an increased pension contribution. As a result of the lower salary, both the employee and the employer make NI savings. In the case of the employer, this could be quite substantial given the employer makes an NI saving for every employee who uses salary exchange.

We believe that salary exchange remains a tax efficient way of making pension contributions despite the recent NI changes and here are the reasons why:

For the employer

The level of employer NI savings remains at 13.8%, and an employer can pay all or part of this saving in as an additional pension contribution for their employees, or they could keep the savings generated to use in other areas of business. As an example of the cost-saving, if we consider an employee earning £35,000 per annum contributing 5% of their basic salary on a salary exchange basis, this will generate a £241.50 per annum saving. If an employer had 100 employees of the same salary and contribution profile, this would generate a saving of £24,150 per annum. Food for thought!

For the employee

Employees would still make a valuable saving, albeit a slightly smaller one. Considering the same employee above, they would have saved £210 per annum (based on 12% employee NI) prior to 6th January 2024 and would now save £175 (based on 10% employee NI).

Under salary exchange, employees also receive immediate tax relief on their pension contributions at their highest marginal rate without needing to fill out a lengthy self-assessment which further enhances the value of the arrangement for them.

In contrast, under a non salary exchange arrangement, higher rate tax relief often needs to be claimed back via an individual’s self-assessment. Analysis shows us that many higher rate taxpayers do not claim back the higher rate tax relief that they are due. A January 2024 study by Interactive Investor, the online investment platform, found that one third of higher rate taxpayers are not claiming back higher rate relief. Furthermore, analysis by the online pension provider, PensionBee, in February 2023 found that there was £1.3 billion of unclaimed pension tax relief between 2016/17 and 2020/21.

To help make the most of your pension contributions our Employee Wealthcare™ team is here to help you set up a comprehensive and tax-efficient benefit package. For advice or help, please contact us on 0207 709 5560 and ask to speak to one of our Employee Benefits advisers.