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Furthermore, employees who are repaying any student loans will have their loan repayments based on the lower post salary exchange salary, which may help to increase their net take home pay.
The are some disadvantages which employers need to bear in mind, for example, the arrangement cannot be used by employees whose earnings are at, or close to the National Minimum or Living Wage. It is important to ensure that the salary exchange does not bring any employee below the minimum rates of pay. Furthermore, some state related benefits, such as statutory maternity pay is calculated by reference to the employee’s taxable earnings.
Similarly, consideration needs to be given to using some form of ‘benchmark’ salary (typically the pre-sacrificed salary) for the purpose of determining: salary increases, mortgage references and death in service benefits.
Advice on how employers can set these schemes up requires proper planning. A key aspect of the exchange will require a variation to the employees contractual terms. This will see the employee’s agreement to a reduction in their salary and in return the employer agrees to pay the corresponding amount in pension contributions on their behalf.
Communication is key to the implementation of a successful pension salary exchange. Typically, consideration needs to be given to staff briefings and written communications which provide key messages, clearly set out the advantages and disadvantages of using an exchange.
There is an expectation that employees will participate in the scheme for a minimum period, typically twelve months. However, there will be certain circumstances where an employee may need to ‘step away’ from the arrangement and so it is widely accepted for certain lifestyle exceptions to apply, for example: marriage or entering into a civil partnership, birth or adoption of a child, redundancy of a member of the employee’s household or death of a spouse or partner.
In conclusion, the use of a thoughtfully planned exchange can help to generate savings for both the employer and employee, encourage pension saving and optimise staffing budgets.
Nick Bustin is the Employment Tax Director at haysmacintyre, the leading provider of audit, accountancy and tax services for professional institutes and membership bodies. To hear more from their experts, consider joining us for an afternoon of networking, drinks and canapés on 17th July. Click here to view the event details and register to attend.
If you want to find out more, or would prefer to watch a video to learn about salary pension exchange click here.