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NI changes spark interest in salary exchange

21 May 2025
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It seems fair to say that economic growth certainly hasn’t been boosted by Rachel Reeves’ controversial NI increases. But interest in the concept of salary exchange most definitely has been.

The bombshell measure, announced by the Chancellor in last October’s Budget and implemented this April, has resulted in employers having to pay NI at 15% on salaries above £5,000, whereas previously they paid it at 13.8% on salaries above £9,100.

But introducing salary exchange to a pension scheme, which involves employees agreeing to give up entitlement to a proportion of salary in exchange for pension contributions, can help offset this additional cost.

Not only do employees enjoy a reduction in tax and NI by virtue of their lower salary, but the company itself also normally saves from lower employers’ NI contributions.

Further related benefits can be derived by, for example, increasing employee pension contribution levels by complementing salary exchange with a full communications package.

A spur to action

We have always tried to highlight the potential advantages of salary exchange to clients who haven’t already implemented it. But not all of them have gone ahead.

However, since the Budget announcement we have found that many of those who had previously considered the approach without actually proceeding are now changing tack.

And there are plenty of client companies we can point to that have recently realised significant savings by finally taking the plunge.

One tech firm with 400 employees, for example, has saved £97,000 a year. A media company with 80 employees has saved £13,000 a year, and a publishing company with 30 employees has saved £7,000 a year.

In many cases the apathy originally demonstrated was primarily the result of failing to realise just how much could actually be saved.

Concerns that the change could involve a lot of onerous paperwork and disruption had also dampened some appetites, but we have been determined to get the message across that this is a misconception.

Chase de Vere can draft all the paperwork on your behalf, make the necessary presentations, write all the letters to staff and produce the FAQs. If required, we can actually pay onsite visits that include one-to-one generic guidance sessions to address individual employee concerns.

Even organisations that had originally been opposed to salary exchange on ethical grounds have proved capable of a change of heart since learning of the NI increases.

For example, a charity that had previously not liked the idea of depriving the government of tax revenue is now saving £20,000 a year after relaxing its stance.

We also have plenty of clients who, although they haven’t yet actually taken any action, are now reconsidering their position and talking about doing so.

Possible low pay barrier

There are relatively few cases where introducing salary exchange to a pension scheme will not benefit a company.

The main potential downside is if an organisation has a lot of employees on very low pay, because there is a danger that the reduction in salary involved could lower their earnings below the National Minimum Wage.

Even if such a breach of the law was inadvertent, it could still result in incurring penalties. It would also create considerable administrative hassle because any underpayments would have to be repaid as soon as possible.

For this reason, we recommend that clients have a Payment Protection Limit to safeguard against breaching the National Minimum Wage. Employees whose salaries fall below this limit are not
auto-enrolled but all others are.

It should also be remembered that a salary reduction could impact on employees’ entitlements to State Benefits.

Only a minority issue

But such caveats are only likely to reduce the appeal of salary exchange to a minority of companies that are heavily geared towards employing minimum-wage workers, for example, those in fields like retail and logistics.

And even in these cases the organisations concerned often have enough back-office staff on higher pay to make salary exchange worthwhile.

If you would like to find out more about how you might benefit from implementing salary exchange in conjunction with your company pension scheme, then please don’t hesitate to contact us.

The information contained within this article is for guidance only and does not constitute financial advice.

Content correct at time of writing.

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