Due to the increased Employers’ National Insurance Contributions (NI), we are seeing more businesses look for cost-effective ways to mitigate this impact while maintaining their competitive employee benefits.
Salary Exchange can be a solution that is beneficial to everyone. Allowing employees to exchange a portion their salary in return for non-cash benefits, such as pension contributions, can reduce your NI bill or even increase employee retirement savings.
Does it sound too good to true? Take a look at the simple changes you can make to your pension plan that could increase your profits.
What are Salary Exchange Pensions ?
Salary Exchange Workplace Pensions allow employees to trade a portion of their gross salaries for pension contributions. This offers significant tax savings both for employers and employees.
Salary Exchange is a direct reduction of employees’ gross earnings, reducing both income tax and national insurance liabilities. You must contribute at least 3% (maximum of 8% including employee contributions ).) of the qualifying earnings.
It’s time to start thinking about it. Drewberry’s most recent survey shows that almost half of UK employees are interested in learning more about potential tax savings associated with Salary Exchange Pensions.
What is it?
Salary Exchange Pensions are available in two different ways: Simple and SMART, both of which offer unique benefits.
Simple Salary Change: Employees’ NI savings are added to their take home pay. The employee receives a higher income each month while still saving on taxes.
Smart Salary Exchange : Savings from NI are transferred to employees’ pension funds, increasing their retirement fund rather than their monthly salary.
Choose the option that best suits the financial goals of both your team and business. Check if the payroll provider you use can support SMART Salary Exchange.
How much can you save?
You, as an employer, can also save. Imagine that you have an employee who earns PS40,000 per year and decides to trade PS4,000 from their salary in exchange for pension contributions. This is how it would look:
| Pre-salary Exchange Pension | Exchange of post-salary | |
| Exchanged amount | PS0 | PS4,000 |
| Gross salary | PS40,000 | PS36,000 |
| Salary over PS5k threshold | PS35,000 | PS31,000 |
| Employer’s NI (15%) | PS5,250 | PS4,650 |
| Annual Savings of PS600 per Employee | ||
Does Salary Exchange Work for Your Business?
Salary Exchange Workplace pensions can be run by almost any employer. This is a flexible option that offers a variety of benefits to you and your employees.
Why it’s great for you
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Reduced NI contributions
The biggest one. Employers pay less National Insurance by reducing the gross salary of their employees. The savings can be re-invested, added to pensions or used as a credit against other benefits.
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Increased remuneration
Salary Exchange Pensions show flexibility and commitment towards employees’ financial futures. This helps retain and attract talent
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Tax benefits
Tax bills for corporations can be reduced by claiming pension contributions as an expense.
Why Employees Love It
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Increase pension savings
Savings from National Insurance can be added to pension pots directly, increasing the value of employee pensions
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Pay Less Tax
Employees pay less income tax and national insurance when their taxable income is lower. Basic-rate tax payers can save as much as 32%. Higher-rate tax payers may be able to save up to 22 %.
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Increase Take-Home Pay
Salary Exchange agreements can also increase take-home wages, depending on the way NI savings is handled.
When it may not be suitable
Salary Exchange Pensions are a great option, but there are also some drawbacks. When deciding on a pension scheme, you’ll have to consider the following:
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Tax penalties could be imposed on high-earners due to the tapered annual allowances.
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Salary sacrifice can have an impact on loan and credit applications, since it lowers the taxable income.
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Other benefits related to earnings, such as maternity pay or state benefits, may also be affected.
Salary Exchange pension schemes are similar to regular ones once they’re set up. There’s just a little more admin. With the right partner managing the process, you’ll be able to avoid the headaches of pensions administration.
Drewberry’s experts will take the time to understand your business, and help you find the best employee benefit plan.
How to Get Employee Buy-In
Salary Exchange benefits for employees are obvious: lower tax bills and getting something back is a big win. Employees may not be aware of or sceptical about the benefits.
Your communication needs to be on point. Clarity and the presentation of benefits are key to getting employees excited about Salary Exchange.
Drewberry’s most recent pensions survey revealed that nearly half of UK employees wanted to learn more about salary exchange and tax savings associated with it.
The same survey also found that 66% of respondents wanted more information on pensions from their employer. It’s important to start those conversations and find out what your employees value
Exchange Worry for Workplace Pensions
Do you have a Salary Exchange pension scheme in your company? Do you think about it now that the world has changed?
Before you decide, there are many things to consider: Your budget, the priorities of your team and your employee engagement strategies will all influence which scheme is best for your employees and business. It is also important to ensure that your scheme is structured and compliant to HMRC guidelines.
Drewberry’s experts will do all the hard work for you, from finding the best scheme to implementing it, and evaluating its performance. We will ensure that everything is compliant and make adjustments as needed, based on feedback from employees and changes in tax regulations. To get started, call 02074425880.
www.drewberryinsurance.co.uk
