An engaging workplace pension

The employee agrees to give up part of their gross salary. The employee’s salary is reduced by that amount. The employer pays that amount into the company pension plan on behalf of the employee.

Benefits of salary exchange:

• Employee National Insurance Contribution (NIC) savings – the employee doesn’t need to pay any NICs on that part of the salary which has been given up
• Employer NIC savings – the employer pays NICs on on the employees' salaries but not for pension payments due to salary sacrifice. The higher the salary, the more you pay in NICs so reducing the employees' salaries in exchange for pension payments would mean less NICs for the employer to pay. 
• Simpler tax relief – since the payment is taken before gross salary is paid, the employee still effectively receives tax relief at the highest rate paid – this makes receiving pension tax relief simpler for higher and additional rate taxpayers
• Potentially improved pension benefits – employees can increase the value of their benefits package at no extra cost

The employer could decide to also invest some of the employer’s NIC savings in the plan, boosting the employee’s pension fund even more.

Salary sacrifice may not be right for some employees. It's a change to their terms of employment contract and could affect their state benefits, other company benefits or their ability to borrow. If they do not currently pay tax, it may not be the best option for them.

To see the difference salary exchange can make, use our Salary Exchange Calculator.