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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