Salary exchange involves making changes to an employee's contract of employment and there are several steps that need to be followed to satisfy legal requirements. In addition, HM Revenue & Customs (HMRC) take an interest in how tax and NICs are affected.
To avoid confusion, we've summarised the key steps you will have to take to set up a salary exchange arrangement. These steps are there as guidance and before doing anything you must seek employment law advice. (A full set of salary exchange guidelines can be found on the GOV.UK website.
- Firstly, you will need to discuss salary exchange with your employees, and clearly communicate the benefits and implications. Your adviser can provide you with an employee guide to distribute to employees.
- You might want to include the option to change the arrangement should an employee experience a lifestyle change. This refers to unforeseen life events (divorce/dissolution of civil partnership, pregnancy, redundancy of partner) which could lead to circumstances where the arrangements under salary exchange are no longer suitable.
- It is essential the arrangement is in place and has been agreed before any salary is exchanged.
- Payslips will need to display the amount of salary exchanged. It is important that this is not accounted for as a deduction. This may create some extra admin for your payroll department and it is worth considering the impact this could have on computer systems and administration processes.
- You must make sure your employees' salaries don't drop below the national minimum wage as a result of salary exchange, and great care needs to be taken with employees whose earnings exceed (but are close to) the Primary Threshold, which is the point at which employees start making National Insurance contributions.
- You need to be aware that the employer is responsible for any shortfall in salary post salary exchange that falls below national minimum wage. You also need to be aware that the employer is responsible for continuing salary exchange pension contributions in the event of certain statutory leave periods including maternity leave.