Chase de Vere’s recent webinar ‘Is salary exchange a win-win for all?’ posed a question in its title that feedback from an impressively large number of attendees answered with a resounding “yes”.
The event, which focused primarily on salary exchange used in conjunction with pensions, helped to highlight the savings that can be realised by the approach – which involves employees giving up entitlement to a proportion of salary in exchange for receiving certain benefits from their employer.
Employees win because their lower overall salary means they pay less tax and NI contributions. They can also enjoy a cash flow advantage because the benefits of higher-rate tax relief can be felt immediately rather than having to wait to claim through self-assessment.
Employers usually also win by having their NI contributions reduced and, because they often agree to share part of this saving with employees by boosting their pension contributions, or enhancing benefits, this can create a further win for employees.
Cost reduction is key for all sizes of company in the current economic environment, and the types of savings we are commonly realising for clients through salary exchange are certainly not to be sniffed at.
For example, just on pensions salary exchange alone, we have recently saved an SME with 20 employees £6,000 a year in reduced Employers National Insurance Contributions, and a larger company with 1,500 employees £480,000 a year!
Additionally, salary exchange can be effective for Childcare Voucher and Cycle to Work schemes. Like pension contributions and employer-funded regulated individual pension advice, these were specifically exempted from tax changes implemented in April 2017 which made the approach less attractive for some other employee benefits.
Our webinar also helped to dispel common misconceptions that have hindered take-up of salary exchange in the past, particularly with regard to fears about time pressures around implementation.
The key message in this respect is that we can support employers throughout the whole process, removing most of the hassle and assisting with the hugely important matter of employee communications.
Although we don’t actually handle the administration, we provide companies with the tools to do so seamlessly themselves. And many clients have admitted that, thanks to our help, the ordeal proved relatively painless.
For these reasons, salary exchange is always one of the first things we discuss with new clients who are not already using it.
But there are still some potential downsides that should receive due consideration before any employer commits to it and, from what we have learned from auditing new clients already using the approach, it is clear that this has not always been the case.
Because those who exchange some of their salary in return for employee benefits are effectively lowering their income, it may not be suitable for low earners.
For example, it is especially important to ensure that the element of salary being exchanged does not take employees below the legal minimum wage. If this happens, the employer will face fines from HMRC and will have to recompense the employees concerned.
For this reason, we normally include a pay protection limit in our salary exchange document, advising employers of the level they can’t go below.
The fact that salary exchange can prove costly during maternity leave provides another possible issue. It’s illegal for employers to make deductions from Statutory Maternity Pay but they are nonetheless still required required to continue to make full pre-maternity rate employer pension contributions.
A further problem we come across is that many salary exchange arrangements fail to have the correct documentation in place. This happens particularly with pensions, where providers tend not to be as good as Childcare Voucher or Cycle to Work scheme providers at issuing proper agreements.
The considerable advantages of salary exchange will often outweigh such potential pitfalls, although they won’t necessarily do so in every single case. So, it should perhaps more accurately be described as a “Win-win for virtually all”.
Chase de Vere can advise on whether the approach is likely to be a win for you and your employees, taking into account factors such as your budget and objectives and the make-up of your workforce.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.