How does the Salary Exchange Scheme work in practise?

Article author
Nneka
  • Updated

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

  • John is paid an annual salary of £20,000.
  • He pays £1,000 (gross) into his pension plan each year and his employer matches his contributions, taking his total pension payments for the year to £2,000.
  • With Salary Exchange, John would stop making payments himself and agree to ‘Exchange’ £1,000 of his salary in exchange for his employer making payments into his pension plan.
  • John’s employer would reduce his salary to £19,000 and pay the ‘Exchanged’ amount (£1,000) into his pension plan.
  • John’s employer will pass on 50% of the employer's NI savings. In this example, this would be £69 (£1,000* 6.9%)
 

Before salary sacrifice (£) 

After salary sacrifice (£)

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 

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