What is salary exchange, and how could it benefit both business owners and employees?

As an employer, a salary exchange scheme could help cut costs in an economically uncertain time. Read how salary exchange can benefit you and your employees.

If you are a business owner in today’s world, it is likely you are searching for ways to reduce costs. Since early 2020, businesses have weathered many storms – the Covid-19 lockdowns and supply chain issues being just two.

According to the Office for National Statistics (ONS), business closures increased by 50% between Q3 2020 and Q3 2021. If your business is still thriving in today’s climate, it’s a testament to your innovation and skill as a business owner; nevertheless, you could still be concerned about how the current cost of living crisis might affect your company going forward.

Fortunately, there is one under-used yet effective way that both businesses and employees can save money, and that is through “salary exchange”.

Salary exchange, also often referred to as “salary sacrifice”, helps both employers and employees to lessen their National Insurance liability, among other key perks.

In today’s world, this reduced liability could be a highly beneficial route to reducing your company’s outgoings, while keeping employees happy too.

Read on to find out how salary exchange works, and the unmissable advantages it presents to business owners and employees.

The basics of salary exchange

A salary exchange is a simple arrangement that works for both parties.

Simply put, an employee exchanges part of their salary, bonus, or even redundancy package for employer-paid perks, usually in the form of pension contributions.

These perks could also include a company car or childcare vouchers, for example.

As an employer, the salary exchange model means you will pay less National Insurance contributions

As a business owner, you will benefit from salary exchange, because you will pay less National Insurance contributions (NICs).

As an employer, you usually pay 15.05% of your employees’ salary in NICs, as of the 2022/23 tax year. However, if you pay a portion of your employees’ income in pension contributions instead of their salary or bonus, you will not pay NICs on those contributions.

The below table shows exactly how making employer pension contributions as part of a salary exchange scheme could save your business money in the 2022/23 tax year.

Number of pension scheme members





Total yearly salary payment before exchange





Total salary exchanged by employee (5%)





Employer NICs rate (2022/23)


Employers annual NICs saving*





*Figures are based on an average salary of £30,000 per employee, each exchanging 5% of their salary for a pension contribution. Employer yearly savings are the NICs that would be paid without salary exchange in place.

Salary exchange could be a particularly attractive benefit for your company in the 2022/23 tax year and beyond, because NICs have been increased by 1.25 percentage points from April.

Plus, Corporation Tax is set to rise in 2023, meaning paying fewer NICs could help you balance the books in future years too.

For an in-depth explanation of the latest NICs changes, read our insights on how the Dividend Tax and NICs increases may affect your wealth.  

2 key benefits of salary exchange for employees

There are important rewards employees can reap from a salary exchange. Here are two salary exchange advantages you could present to your employees when discussing this model.

1. Employees could pay lower Income Tax

Although, in the spring statement, chancellor Rishi Sunak pledged to cut the basic rate of Income Tax by 1p in 2024, many employees may still be searching for ways to mitigate their Income Tax bill in future years.

A salary exchange arrangement can do just that. When an employee takes home a “lower” salary in exchange for employee-paid pension contributions, they only pay Income Tax on the salary amount they earn.

Especially considering that the Income Tax Personal Allowance and lower-rate threshold have been frozen until 2026, salary sacrifice could be a great help to employees looking to lessen their Income Tax bill.

To learn more about the recent allowance freezes, read our article explaining how they may affect your taxation in future years.

2. Employees can save more easily towards retirement

By accepting employer pension contributions as part of a salary exchange, your employees can save more easily towards retirement.

Indeed, UK inflation reached 7% in March 2022, leaving some savers worrying about the spending power of their later-life income, particularly if they are set to retire in the next decade.

So, by maximising the tax-efficient Annual Allowance through employer pension contributions, your employees can gain the peace of mind that their retirement savings are on the right track. They could even retire earlier than they had planned to by benefiting from this system.

Remember: not only do employers pay less NICs through pension contributions, but employees also pay no NICs on these contributions, either. So, employees can enjoy tax-efficient pension contributions and pay lower NICs too.

As with all pensions, the value of your investments can go down as well as up, and your employees may not get back the original amount invested in their plan.

Get in touch

If you are considering salary exchange options as a business owner, contact us. Your Kellands financial planner can help review your company’s circumstances and assist in implementing a salary exchange scheme that benefits everyone.

Our professional guidance can help you feel confident about cutting costs where necessary, while still providing a solid framework for both your clients and employees.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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