In the current economic climate, maximising tax saving opportunities within a pension is becoming more and more important.
What is Salary Exchange?
Salary Exchange enables the member and/or employer to retain the National Insurance (NI) that would otherwise be payable on any personal contributions to a pension arrangement.
Personal contributions to any pension scheme are normally eligible for full income tax relief, however they are liable for both employer’s and employee’s National Insurance. If personal contributions are switched to employer contributions and the member’s salary is reduced by an equivalent amount, then both the employer and employee save the NI on that amount.
This NI saving can be used to increase the contribution, to increase the member’s take home pay and as a cost-saving for the employer; or any combination of these.
For example – a member wishes to contribute £100 pm as a personal contribution. If this is done by way of a reduction in salary, there is a personal NI saving of £12 and an employer’s NI saving of £13.80. This can all be added to the pension contribution and paid as an employer’s contribution, with no increase in cost to either party. (This assumes that the member’s contribution falls below the upper NI threshold).
In addition, full tax-relief is obtained immediately under this arrangement – as contributions are paid by the employer and not taken as salary, they are not liable for personal income tax.