SPONSORED ARTICLE
Changes to national insurance (NI) and minimum wages make a compelling case for salary exchange, says Susan Hope, workplace savings specialist at Scottish Widows.
As of 6 April, the increased costs via the employer NI increase (up from 13.8 percent to 15 percent) coupled with the national living wage (NLW) increase from £11.44 to £12.21 an hour will be at the forefront of many employer’s minds.
Salary exchange can provide some welcome respite from these costs, either via implementation of a new arrangement or a full review of existing arrangements to ensure they are still fit for purpose and all savings are being maximised.
Salary exchange is an agreement between an employee and employer to exchange gross salary for an employer contribution. As the exchanged amount never hits the employee’s pay packet, both the employee and employer save on NI.
The case for salary exchange
There’s a compelling case for salary exchange as many see it as delivering one of the highest returns on investment of any employee benefits measure available to UK businesses. This is based not only on saved NI, but also increased pension participation and higher staff retention and lower turnover.
For every £100,000 in exchanged salary, the employer stands to save £15,000 in NI annually. They can choose to keep that saving (potentially using it for other staff benefits) or redirect it to their employee’s pension contributions.
For the employee the saving is 8 percent for basic rate taxpayers and 2 percent for higher rate taxpayers. This saving can be used to increase take home pay or increase the overall pension contribution.
Over time, if all savings are reinvested, it can make a 7-9 percent difference to an employee’s retirement pot, with no additional cost to the employer or employee. Based on a salary of £35,000, over 25 years it could add £20,600 to the pot.
Implementation
If you do want to go ahead there is support available. There are key things to consider:
- Make sure your payroll is engaged, and they can facilitate your salary exchange model.
- Establish a salary exchange floor (to avoid crossing NLW), maximum exchange amounts and approach to variable pay.
- Decide on your implementation method and maintain comprehensive documentation.
- Communicate clearly, provide proof points and FAQs for your employees.
- Define clear positions on maternity pay and other statutory benefits.
Review existing salary exchange schemes
If you already operate a salary exchange arrangement now is a perfect time to review it, in advance of the increased costs and benefits from 6 April. Things to consider are:
- What additional savings are going to be available as a result of the increased NI rate post April?
- What would you like to do with those additional savings; could they be used for other staff benefits?
- If there is a good news story to tell make sure it is communicated clearly to your employees.
- Check your employee participation levels? Which employees are still paying a personal contribution and why?
- Can you increase participation by changing your implementation method? Did opt-in work previously? Could moving to an opt-out or contractual basis increase uptake and therefore your savings.
- Review your salary exchange floor. Make sure any employees earning around the new national living wage, which is £12.21 per hour or £22,200 based on a 35-hour week are excluded from salary exchange.
- Review your maximum salary exchange amount. Many employers will impose a maximum limit. This is key when considering the employer duty around maternity and parental leave, where the employer must maintain the full exchanged contribution for the period of paid leave.
The salary exchange story has never been so compelling, make sure you make the very most of your money, and that’s true for you and your employees. If this isn’t part of your pension strategy, it’s worth discussing with your provider or scheme adviser.
