How does the Salary Exchange Scheme work in practise?

Article author
Nneka
  • Updated

To see how Salary Exchange/Sacrifice might affect an employee's salary and pension payments, we will review the following example:

  • John is paid an annual gross salary of £20,000.
  • Before enrolling in the salary exchange/sacrifice, he contributes £1,000 (gross) into his pension plan each year and his employer contributes 4%.
  • After exchange/sacrifice, John will stop making contributions himself and agree to ‘exchange/sacrifice’ £1,000 of his gross salary with his employer.
  • John’s employer will reduce his gross salary to £19,000 and pay the ‘exchanged/sacrificed’ amount (£1,000) into his pension plan.
  • John’s employer will contribute not only the £1,000 that has been ‘exchanged/sacrificed’, but also 50% of the employer's National Insurance savings. In this example, this will be £69 (£1,000 * 13.8% * 50%)

Example:

 

Before salary exchange/sacrifice

After salary exchange/sacrifice

Gross Salary

£20,000

£19,000

John’s pension payment

£1,000

£0

Employer pension payment

£800.00

£1,869.00

Employee

5%

5%

Employer pension payment

4%

4% plus 50% of the employer's National Insurance savings

 

Important Note
Starting from April 1, 2024, employees currently contributing through a net pay arrangement scheme will be automatically transitioned to a salary sacrifice scheme, unless they choose to opt into a relief at source scheme or if they are close to earning the national minimum wage.

See also: All about Salary Exchange in the UK

This change will result in both a slightly higher pension contributions and take-home pay. 

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