Should you accept a salary exchange? The workplace “sacrifice” that could help you in future

As the UK’s cost of living crisis continues, you might be under continuing pressure to cut costs and save money where you can.

Indeed, the cost of everyday goods and services in the UK has rapidly increased in the past year. This is reflected by the inflation rate which, according to the Office for National Statistics (ONS), reached 9% in May 2022.

It could be that your monthly salary payments are not stretching as far as they used to and, as a result, you could be cutting corners on important savings and investments.

If you are sacrificing pension contributions and other important savings in light of the rising cost of living, you aren’t alone. According to FTAdviser, more than half of Brits are struggling to put more than the minimum into their pension pot.

As you may already know, putting funds in place for your later life is a crucial step to take, no matter your age or wealth status.

There are many routes you can take when it comes to saving for the future, and one viable option you can explore is salary exchange, also known as “salary sacrifice”.

Here’s how salary exchange works, and the pros and cons of choosing this remuneration strategy.

The basics of salary exchange

“Salary exchange” describes an agreement between an employer and an employee, in which the employee will exchange a portion of their take-home pay for another form of remuneration.

These remunerations usually come in the form of employer-paid pension contributions, but can also include:

• A company car
• Childcare vouchers
• Healthcare perks, such as a gym membership or private medical insurance
• A parking space outside a city-centre office.

It is important to bear in mind that not all employers offer salary exchange, and indeed, not everyone would benefit from this scheme.

If your employer does offer salary exchange, or you run an SME and want to offer salary exchange to your employees, it could be constructive to work with a financial adviser when making this decision.

2 key benefits of salary exchange

1. You could build up your pension savings more easily

By increasing your pension contributions through salary exchange, you could build up your retirement savings more efficiently.

Indeed, saving into your pension can provide you and your family with a stable income in later life – but with so many other costs to balance, it can be hard to make significant contributions into your pension.

With a salary exchange scheme, you may opt to make increased regular pension contributions each month. In this instance, these payments are made from your salary, which makes them a tax-efficient way to save (more on this below).

Boosting your pension pot through salary exchange could provide you with the peace of mind that, when it comes to draw your later-life income, you may have enough to sustain your lifestyle for as long as you need.

2. You can pay less National Insurance contributions and Income Tax

In addition to helping fund your retirement, a pension contribution salary exchange can also lower your National Insurance contributions (NICs) and Income Tax.

For example, as an employee, you won’t pay NICs on the amount you “sacrifice” into your pension.

Plus, when it comes to Income Tax, you will also make valuable savings. Seeing as your take-home pay may be lower in a salary exchange agreement, your Income Tax would then decrease in line with this – while the rest of your salary is routed safely into your pension by your employer.

In some cases, you could even remain in a lower tax band, while a portion of your salary is saved tax-efficiently elsewhere.

So, by making the most of salary exchange, you could mitigate your tax liability and be able to use your hard-earned wealth to support yourself and your loved ones during the cost of living crisis.

Not only can you save on NICs when opting for a salary exchange, but your employer can reduce their NIC liability, too. They may even elect to pay some of their NIC savings into your pension, increasing the contribution further.

Usually, in the 2022/23 tax year, employers pay 15.05% of an employee’s salary in NICs. However, if they reroute some of this salary towards pension contributions, your employer won’t pay NICs on that portion of income.

Things to consider when accepting a salary exchange

Of course, while salary exchange is a fantastic option for some, others may not find that it works for them.

Inevitably, when accepting pension contributions, a company car, childcare, or another employer-provided perk, your take-home pay will decrease as a result.

Even if you are content with receiving less take-home pay on a monthly basis, it is important to be aware of how this might look on paper. For example, a lower take-home salary could affect:

• Your ability to apply for a large mortgage, as lenders will likely base their decision on your take-home pay
• Any redundancy pay you receive, which will be calculated in line with your take-home salary
• A potential reduction in workplace benefits, such as healthcare and death in service benefits, in line with your “lower” pay.

If you are considering accepting a salary exchange from your employer, it may be beneficial to discuss this move with your financial adviser. We can work with you to ensure the salary exchange scheme you are offered is beneficial for you and your loved ones, giving you the peace of mind you need when you make this shift.

Get in touch

If you are exploring the option of salary exchange during the cost of living crisis, get in touch with us. Your Chancellor financial adviser can review your circumstances and help you make an informed decision that could benefit you and your family.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.