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    Salary Exchange

    Reduce costs and enhance Employee Benefits

    Salary Exchange (also known as Salary Sacrifice) is an arrangement that allows employees to exchange part of their salary for non-cash benefits (such as pension contributions) while delivering National Insurance savings for both employers and employees.

    Our experts can talk you through available benefits including child care vouchers and additional pension contributions and we’ll keep you updated as legislation changes to ensure you remain compliant.

    Importantly, we can then convey the benefits, and risks, of Salary Exchange to your employees. We do this for many of our clients, often in tandem with other financial education topics like retirement planning.

    Ask us about how Salary Exchange could save your business and employees money
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    Hear from our clients
    How can Salary Exchange make a different to your business?

    Wren Sterling helps organisations implement Salary Exchange.

    It’s a complex process that requires the support of an expert but as our client, The Box Factory, explains, the impact can make a big difference to a business’ bottom line, or in their case, the pension savings of their employees.

    Salary Exchange Tax Benefits for Employees

    A small business owner talking with a workplace business adviser

    Over time, tax savings through Salary Exchange can allow employees to make higher pension contributions without increasing the net cost, supporting long-term retirement outcomes.

    Employees can also choose from different tax-exempt Employee Benefits to support their Physical and Mental wellbeing, such as Gym memberships, Childcare vouchers, or payments into pension schemes. The flexibility of Salary Exchange schemes ensures that employees can access services that they will truly value.

    Avoid Salary Exchange Pitfalls

    Switching to Salary Exchange for all of these employees can be complicated and costly as employment contracts will need to be amended and payroll updated.

    To complicate matters further, employees are able to opt in and out – and this will affect their terms of employment, which must be kept up to date. Our Workplace advisers can help you set up a robust Salary Exchange scheme.

    Understanding Salary Exchange

    How does Salary Exchange work?

    At its most basic, Salary exchange schemes allow employees to exchange a portion of their salary for access to other benefits. As employees’ gross wages are smaller, they pay less income tax and National Insurance (NI), and the employer saves on NI too. Employees may be hesitant to reduce their pre-tax salary, but there are benefits for both employee and employer.

    With Salary Exchange, employees and employers can pay tax savings into the employee’s pension pot – helping them increase their retirement savings. Employers could choose to improve (or create) their employee benefits package thanks to these savings.

    If a business isn't offering Salary Exchange to their employees, they could be missing out on National Insurance savings for the business and employees, so it's certainly worth looking into. I always advise firms to tread carefully though as there can be unintended consequences to beware of and HR processes to adhere to.
    Sarah Herd, Head of Workplace

    Why use Salary Exchange?

    Implementing Salary Exchange could save your business and your employees a significant amount of money. 41% of SMEs offer their employees the chance to pay pension contributions via Salary Exchange.
    Less than half of SMEs offer salary sacrifice, ftadviser.com

    How can Wren Sterling help me create or optimise my Salary Exchange scheme?

    Wren Sterling’s Workplace team can help. We help our corporate clients manage their Employee Benefits, Workplace Pension schemes, Group Risk and Protection products – as well as educating employees about the benefits of the scheme, maximising the company’s return on investment.

    Get in touch Find out more about Employee Benefits Advice

    Salary Exchange FAQs

    • What is Salary Exchange?

      What is Salary Exchange?

      Salary Exchange (sometimes known as Salary Sacrifice) is an agreement between employer and employee, where the employee agrees to a reduction in their salary to for other non-cash benefits from their employers including pension contributions, childcare vouchers, bus passes etc.

      What should employees consider when joining a Salary Exchange scheme?

      Employees should consider what a reduced gross salary could mean for them. Salary Exchange can affect the amount of cash they receive each month, how much they can borrow (as credit providers may calculate this on salary), and other earning related benefits including their State Pension, Life cover and maternity pay.

      Employees can also decide how much they would like to exchange, but this will depend on their employment contract, and their take home salary must not fall below minimum wage.

    • Do employees have to opt in to Salary Exchange schemes?

      Do employees have to opt in to Salary Exchange schemes?

      Salary Exchange is not mandatory, and employees can opt out at any time. However, if employees are making use of non-cash benefits like the cycle-to-work scheme, they may have to pay off the balance of the agreement, or the value of the bike, depending on the plan details.

      Income Tax and National Insurance contributions will not need to be paid on suitable employee benefits– which can cause the employee’s tax treatment to change. As employees surrender a portion of their salary for other benefits, this can affect their income tax rate and eligibility for other benefits.

      When is it not possible for an employee to use Salary Exchange?

      Employees can decide how much they would like to exchange, but this will depend on their employment contract, and their take home salary must not fall below minimum wage.

    • How does Salary Exchange work?

      How does Salary Exchange work?

      At its most basic, everyone pays less tax and exchanges this for access to other benefits. As employees’ gross wages are smaller, they pay less income tax and National Insurance (NI), and the employer saves on NI too. Employees may be hesitant to reduce their pre-tax salary, but there are benefits for both employee and employer.

      With Salary Exchange, employees and employers can pay tax savings into the employee’s pension pot – helping them increase their retirement savings. Employers could choose to improve (or create) their employee benefits package thanks to these savings.

    • Are employees automatically enrolled in Salary Exchange schemes?

      Are employees automatically enrolled in Salary Exchange schemes?

      Eligible employees must be enrolled in their employer’s workplace pension. It is mandatory for the employer to offer this, but the employee can opt out of a workplace pension.

      For Salary Exchange, employers need to ask employees if they wish to be part of the exchange arrangement, but whether the employee chooses salary exchange or not, they must still be given membership of the workplace pension scheme. These are two separate arrangements, working together.

    • Does Salary Exchange affect employee’s State Pension?

      Does Salary Exchange affect employee’s State Pension?

      Employees do not pay tax (including National Insurance) on the income they exchange to provide an exempt benefit. Whether an employee will receive a state pension depends on their National Insurance record, so it is possible that this could affect your eligibility if income falls below the Lower Earnings Limit.

    • Is Salary Exchange right for employers?

      Is Salary Exchange right for employers?

      Every employee between 22 and the State Pension age who earns more than £10,000 each year should be enrolled into a workplace pension scheme. Switching to Salary Exchange for all of these employees can be complicated and costly as employment contracts will need to be amended and payroll updated.

      To complicate matters further, employees are able to opt in and out – and this will affect their terms of employment, which must be kept up to date.

    • Is setting up a Salary Exchange scheme complicated?

      Is setting up a Salary Exchange scheme complicated?

      Every employee between 22 and the State Pension age who earns more than £10,000 each year should be enrolled into a Workplace Pension Scheme. Switching to Salary Exchange for all of these employees can be complicated and costly as employment contracts will need to be amended and payroll updated.

      To complicate matters further, employees are able to opt in and out – and this will affect their terms of employment, which must be kept up to date.

    • Can I set up a Salary Exchange scheme if I’m self-employed?

      Can I set up a Salary Exchange scheme if I’m self-employed?

      Salary Exchange is not available if you are self-employed. If operating through a limited company, you are able to structure your own remuneration package as you choose, i.e. salary, dividends, pension funding, so a salary sacrifice agreement wouldn’t usually be necessary. We recommend anyone who is self-employed, who naturally has more complex pension arrangements, to get in touch with us for financial advice.

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    The Financial Conduct Authority do not regulate tax planning. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

    Please note this article is for information only and does not constitute advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.