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 matches his contributions, taking his total pension contributions for the year to £2,000.
  • 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%)
 

Before salary exchange/sacrifice

After salary exchange/sacrifice

Gross Salary

£20,000

£19,000

John’s pension payment 

£1,000

£0

Employer pension payment 

£1,000

£2,069

Total pension payment 

John will pay less tax on his reduced salary, which will increase his take-home pay. Alternatively, John could choose to exchange slightly more salary in order to increase his total pension payments and keep his take home pay the same. 

Take home pay 

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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