In these economic times why would you ask your employer to pay you less?!
Salary exchange has always provided an ideal opportunity to make pension contributions while saving in national insurance and as national insurance rates have increased, salary exchange, as an option to make pension contributions, has grown in popularity.
In addition to national insurance savings, for higher rate tax payers, the use of salary exchange to make pension contributions generates automatic higher rate tax relief on their pension contributions, removing the requirement to claim this via their tax return or tax reclaim. In addition, as higher rate tax relief on personal pension contributions is constantly under threat, salary exchange may provide the opportunity for higher rate tax payers to preserve their higher rate tax relief a little longer!
Salary exchange works by agreeing to a reduction in your salary, rather than making a personal pension contribution from your take home pay. In exchange for this salary reduction, your employer contributes an equivalent amount to your pension plan. The reduction in salary generates a national insurance saving for both you and your employer. This saving can either be retained by both parties or rebated, in full or partially, to your pension to increase your pension investment at no additional cost to yourself or your employer.
Many employers are adopting salary exchange using a basis referred to as SMART (save money and reduce tax). Using this method the employee is left with the same take home pay and uses their national insurance saving to increase their pension contributions. This contribution may be further enhanced if the employer is willing to pass on some or all of their national insurance saving.
In this way an employee can increase their pension contribution by up to 30% of their current personal contribution.
Whilst there are plenty of savings to be had by opting into salary exchange, there are some things you should bear in mind. For example, your lower earnings may impact on earning related state benefits such as state pension benefits. Also a reduced salary may have an impact elsewhere e.g mortgage applications, group protection, overtime. These are, however, often addressed by using a notional pre exchange salary.
More information on salary exchange can be found at HM Revenue & Customs: Salary Sacrifice Questions and Answers
If you would like to discuss salary exchange in more detail contact Karen Robinson.
