Salary exchange, is an arrangement through which your employees agree to reduce their salary or bonus in exchange for a pension contribution paid by you, their employer.
To see how salary exchange might affect your employees' salaries and pension payments we'll look at an example case.
Steve is paid an annual salary of £20,000. He pays £1,000 (gross) into his pension plan each year and his payments are matched by his employer, taking his total pension payments for the year to £2,000.
- With salary exchange, Steve could stop making payments himself and agree to 'exchange' £1,000 of his salary for a pension payment paid by his employer.
- Steve's employer would reduce his salary to £19,000 and pay the 'exchanged' amount (£1,000) into his pension plan, along with the £1,000 they already pay on his behalf.
| Before salary exchange | After salary exchange | |
| Salary | £20,000 | £19,000 |
| Steve's pension payment | £1,000 | £0 |
| Employer pension payment | £1,000 | £2,000 |
Total pension payment: Steve will pay lower NICs on his reduced salary which will increase his take-home pay. Or, Steve could choose to exchange slightly more salary to increase his total pension payments and keep his take-home pay the same.