Salary exchange schemes

Joseph Warne at Pareto Financial Planning describes an opportunity for businesses amid rising employer National Insurance contributions

 

The Autumn Budget 2024 introduced significant changes for UK employers, including an increase in employer National Insurance Contributions (NICs). From April 2025, the employer NIC rate will rise by 1.2% from 13.8% to 15%, adding to the financial pressure on businesses already grappling with higher costs.

 

Against this backdrop, salary exchange schemes (also known as salary sacrifice schemes) can present a compelling opportunity for both employers and employees to navigate these challenges more effectively.

 

It is estimated that just 45% of SMEs offer a salary exchange scheme in the UK. A salary exchange scheme allows employees to give up a portion of their gross salary in exchange for certain non-cash benefits, such as pension contributions, electric vehicles or a cycle-to-work scheme.

 

The appeal lies in the fact that these benefits are exempt or partially exempt from NICs and income tax, enabling savings for both employers and employees. Here’s why implementing such a scheme could make sense in today’s economic climate.

 

The employer perspective

Employers should consider why salary exchange schemes can be a good idea for their business:

 

1. Mitigating the employer NIC increase

With the recent budget increasing employer NIC rates, salary exchange schemes provide a way to reduce NIC liabilities. When an employee’s gross salary is reduced through salary exchange, the employer pays NICs only on the lower amount. For businesses with large workforces, these savings can be substantial, helping offset the additional cost burden from the NIC hike.

 

2. Enhancing recruitment and retention

The UK labour market remains competitive, with businesses vying to attract and retain talent. Offering salary exchange schemes can differentiate an employer by providing cost-effective benefits that resonate with employees. Features like enhanced pension contributions, electric vehicle schemes, and additional savings opportunities can make an employer more attractive, by focusing on financial and environmental goals.

 

3. Improving cash flow

Salary exchange schemes result in lower NIC payments, freeing up cash flow for businesses. This cash can be reinvested into other areas, such as employee development programs, new technology, or operational efficiency improvements, further boosting the organisation’s resilience and growth potential.

 

4. Promoting environmental and social goals

Salary exchange schemes can support corporate social responsibility (CSR) objectives. For instance, offering electric vehicle leasing through salary exchange encourages greener commuting, aligning the company with net-zero carbon goals. Similarly, childcare voucher schemes promote work-life balance, enhancing employee well-being and supporting diversity and inclusion efforts.

 

5. Boosting employee engagement at minimal cost

By implementing salary exchange, employers can offer valuable benefits with minimal financial outlay. For instance, allowing employees to save on NICs while increasing their pension contributions or providing access to electric vehicle schemes can boost morale and engagement, as employees see tangible financial and lifestyle improvements.

 

The employee perspective

There are several reasons why salary exchange schemes could also work for employees:

 

1. Increased take-home value

For employees, a salary exchange scheme could translate to tax and NIC savings. By sacrificing part of their gross salary in exchange for tax-efficient benefits, they can increase their take-home value. For example, additional pension contributions made through salary exchange are free from income tax and NICs, directly contributing to retirement savings without reducing overall disposable income. It’s important to check how your tax payments may change and to be mindful of any tax implications in the future.

 

2. Access to cost-effective benefits

Salary exchange schemes can make otherwise expensive benefits more affordable. Electric vehicle leasing is a prime example, where salary exchange allows employees to benefit from lower tax rates under the government’s company car taxation rules. Similarly, childcare vouchers and cycle-to-work schemes can be accessible at reduced costs, offering financial relief for working families and promoting green commuting / contributing to workplace health and wellbeing etc

 

3. Simplified financial management

Salary exchange schemes can simplify financial planning for employees. Contributions toward pensions or leasing arrangements are deducted before tax and NICs, making it easier for employees to budget and manage their finances. These schemes also eliminate the need for upfront payments for large expenses, such as electric vehicles or bicycles.  

 

A word of caution for employees

Be careful that any scheme introduced doesn’t take your salary below the National Minimum Wage or National Living Wage and also be mindful that it could affect your entitlement to benefits like statutory sick pay. Additionally, you should factor that any reduction in salary, through a scheme, could impact your ability to raise a mortgage, your credit limit on a credit card or personal loan limits.

 

Key considerations

Key considerations for employers Implementing salary exchange include:

1. Communication and education. Salary Exchange is a contractual change.  Therefore, it needs to be communicated accordingly.  To maximise the impact of a salary exchange scheme, employers must educate their workforce on the benefits and implications. Clear communication ensures employees understand how the scheme works and how it positively affects their finances.
2. Administrative setup. Implementing a salary exchange scheme requires adjustments to payroll systems and compliance with HMRC guidelines. Employers should ensure their systems are equipped to handle the changes and that employees receive accurate, timely information.
3. Tailored offerings. Employers should customise their salary exchange benefits to align with employee preferences. For instance, some employees may value electric vehicle leasing, while others may prioritise enhanced pension contributions.
4. Monitoring legislative changes. Employers must stay abreast of changes in tax laws and NIC rates to adapt their salary exchange schemes accordingly. For example, ensuring compliance with rules around pension auto-enrolment and minimum contribution levels is critical. 

Benefits for employers and employees

As businesses grapple with rising costs, including the Autumn Budget’s increase in employer NICs, salary exchange schemes can offer a strategic solution that benefits both employers and employees. Employers can reduce NIC liabilities, improve recruitment and retention, and promote sustainability, while employees enjoy enhanced financial benefits and access to valuable perks.

 

In a challenging economic environment, salary exchange schemes represent an opportunity, making them a powerful tool for forward-thinking organisations. By acting now, employers can position themselves as attractive, responsible, and cost-efficient while helping their employees to achieve their financial and lifestyle goals.

 

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Joseph Warne is Head of Employee Benefits at Pareto Financial Planning

 

Main image courtesy of iStockPhoto.com and scene26