What is Salary Exchange?
Salary exchange, also known as salary sacrifice, is an arrangement between an employer and employees, where a portion of an employee’s gross salary is exchanged for a non-cash benefit, such as pension contributions, electric vehicles, or cycle-to-work schemes.
It is a tax-efficient way for employees to make pension contributions and for employers to reduce their National Insurance Contributions (NICs), which are currently 15% as of the 2025/26 tax year.
How Does Salary Exchange Work?
- Employers inform staff about the introduction of salary exchange and set a future date for implementation (subject to consultation regulations).
- Employees are automatically switched to a Salary Exchange contribution basis unless they choose to opt out within a pre-defined window. Those who opt out continue contributing from net pay as before.
- The exchanged amount is documented in an amendment to the contract of employment.
Can Salary Exchange Be Used with Existing Pension Plans?
Yes, it can be introduced into both new and existing workplace pension schemes.
Example Calculation
In this example, based on 50 employees and an average salary of £35,000, the employer saves over £13,125 per year, which can be reinvested into employee benefits at no additional cost, whilst also enhancing the efficiencies to the employees as noted below.
