Nov 142 min read

Salary Exchange for pension contributions

Updated: Nov 19

Two big changes to Employer NI were introduced in the Autumn Budget:

1.Employers National Insurance (NIC) will increase from 13.8% to 15% in April 2025.

2. The rate at which the employer (ER) must start paying employer NI will reduce from £9,100 per annum per employee to £5,000. This change results in an additional £615 cost per employee per year.

What is Salary Exchange?

A salary exchange arrangement enables employees to exchange part of their salary for a non-cash benefit from their employer, such as pension contributions. Salary Exchange is also referred to as Salary Sacrifice.

An employee agrees to reduce their salary by an amount equal to their pension contribution and in exchange, the employer then agrees to pay the employee’s salary exchange as an additional employer pension contribution.

A salary sacrifice pension scheme means employers can offset the increase in National Insurance tax, while employees can increase their take-home pay and save more for a comfortable life after work.

Benefits

· Enhanced Employee Take-Home Pay and Benefits: Salary exchange can also increase employees’ net pay. In this scenario, each employee would see an average increase of about £140 in their net pay, while still maintaining their pension contributions. Employers can also choose to allocate some of the NI savings back to employees’ pensions, enhancing retirement benefits without raising payroll costs.

· Reduction in Employer NI Contributions: Salary exchange can lower the total salary that is subject to NI. For an employer with ten employees earning an average salary of £35,000, implementing salary exchange for pension contributions could save around £2,625 per year on NI contributions after 2025.

What happens to the saving?

The employees’ saving can either be added to their pension pot or used to increase their take-home pay.

From April 2025 employers could save 15p for each £1 exchanged by the employee over £12,570.

Why Now Is the Time for Action

The increased NI rates and lower thresholds mean businesses will face growing tax liabilities. Implementing salary exchange schemes allows employers to manage these additional costs while supporting their employees’ financial well-being, which is crucial as living costs rise.

In summary, Labour’s 2024 Budget represents a significant change for employers navigating a challenging economic landscape. Salary exchange is a practical tool for reducing payroll taxes, enhancing benefits, and retaining employees more affordably. This strategy is essential for business owners looking to maintain financial stability in the coming years.

If you have any questions, please do not hesitate to get in touch with your local branch today.

Carmarthen Branch - Llys Deri, Parc Pensarn, Carmarthen, SA31 2NF

01267 237534 | carmarthen@lhp.co.uk

Haverfordwest Branch - 1st Floor Agriculture House, Winch Lane, Haverfordwest, SA61 1R 01437 766749 | haverfordwest@lhp.co.uk

Lampeter Branch - Tŷ Harford, Sgwâr Harford, Llambed. SA48 7HD

01570 422204 | lampeter@lhp.co.uk

Tenby Branch -Barclays Bank Chambers, 18 High Street, Tenby, SA70 7HD

01834 844743 | tenby@lhp.co.uk

Aberaeron Branch - 1 North Road, Aberaeron, Ceredigion SA46 OJD

01545 570401 | Aberaeron@lhp.co.uk

Cross Hands Branch - Suite 3 & 6, Block B, Llys Y Barcud, Cross Hands, Llanelli, SA14 6RX 01269 834877 | crosshands@lhp.co.uk

Aberystwyth Branch - Aberystwyth Innovation & Enterprise Campus, Gogerddan, Aberystwyth, Ceredigion SY23 3EE