With National Insurance contributions set to rise, could you save with a salary exchange pension scheme?

As changes to National Insurance (NI) come into effect in April, taking the contribution rate from 13.8% to 15% and reducing the threshold to £5,000, businesses have an opportunity to review their pension schemes and explore the cost-saving possibilities of implementing a salary exchange arrangement.

What are salary exchange pension schemes?

Salary exchange, also known as salary sacrifice, is an arrangement where employees agree to reduce their gross salary by an agreed percentage, which is then redirected into their pension pot as an employer contribution. With upcoming changes to National Insurance expected to have a financial impact on most businesses, salary exchange pension schemes offer an opportunity to offset the cost of the rise in contributions.

Benefits for employers:

NI savings - the exchanged salary reduces the gross earnings on which employer NICs are calculated, ensuring employers save on NI contributions in comparison to other types of workplace pension schemes.
Attractive employee benefit - a salary exchange pension scheme is often viewed as an attractive employee benefit, helping you to attract new recruits, retain employees, and enhance employee satisfaction.
Cost-efficiency - these savings can reduce overall employment costs.

Benefits for employees:

Tax and NI savings - the portion of salary exchanged is exempt from income tax and employee NI contributions. The NI savings can be redirected to increase either the employees take home pay or contributions to their pension plan.
Increased retirement savings - by redirecting pre-tax salary into their pension, employees have the potential to build a larger retirement pot over time, without decreasing their take-home pay.

While salary exchange pension schemes have clear benefits, it’s important to consider its impact on state benefits tied to salary, such as statutory maternity pay, sick pay, and state pension entitlements. You’ll also need to consider that employees cannot be enrolled on a salary exchange pension scheme if the deductions would take their salary below the National Living Wage – in these cases, the affected employees can be enrolled on a non-salary exchange scheme instead.

Depending on the pension provider, it can take 6-8 weeks to move a pension scheme, which will need to be factored into your timescales in relation to the upcoming NI changes.

How we can help

At Alan Boswell Employee Benefits, we specialise in helping businesses implement and maintain salary exchange pension schemes.

Our team works with you to explore your current pension arrangements and where improvements can be made to benefit both the employer and employee. Alongside advice and consultation, our team can set up and administer the scheme, including communicating the changes to your employees and answering any questions they may have. Beyond implementation, we offer ongoing support, including administration, updates on legislative changes, cost analysis to demonstrate the financial impact of the scheme on your business, and yearly reviews to ensure the scheme is suitable for your employees (a requirement of The Pensions Regulator).

We recently helped Norwich City Football Club to implement a salary exchange pension scheme. Read more about this here.

Find out more

If you’d like to discuss your current pension arrangements and the possibility of implementing a salary exchange scheme, contact our employee benefits team to arrange an initial free, no-obligation discussion.

Speak to us: 01603 967967

Dee Myhill

Senior Employee Benefits Consultant

Telephone

01603 218027

dmyhill@alanboswell.com

Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.

Tax benefits depend on your individual circumstances and the laws concerning these can change.