Salary Exchange

Dinok

Hi

The company I work for has just sent me a letter proposing a Salary Exchange to pay my pension contributions instead of the normal way it’s done. I am somewhat confused but this as not really sure whet it means. They say I will be saving on my NI contributions over the year but effectively my gross salary will be lower.

Does anyone know what it really means and if I should opt out if it or not.

Thanks

cloud_dog

Dinok wrote: »

Hi

The company I work for has just sent me a letter proposing a Salary Exchange to pay my pension contributions instead of the normal way it’s done. I am somewhat confused but this as not really sure whet it means. They say I will be saving on my NI contributions over the year but effectively my gross salary will be lower.

Does anyone know what it really means and if I should opt out if it or not.

Thanks

The simple answer is that it is good for you.

You are 'sacrificing' or 'exchanging' some of your salary (pension contributions) for the company to make those contributions on your behalf rather than from your salary (earnings).

This does mean that, in essence, you have a slightly lower salary; you will notice this in your P60 etc. Years ago there was a concern that that might affect your borrowing power for a mortgage etc, i.e. lower salary / borrow less but, nowadays everyone is used to this concept and providing proof of your 'salary' is acceptable.

Benefit to you... The main one is the reduction in NI contributions. Because your pension contributions are no longer being paid to you (but directly in to your pension) you have not earned that amount of money and therefore you do not pay NI contributions on it.

For a HRT payer (40%) you reduce your NI by 2% of the exchanged amount.

For a LRT payer (20%) you reduce your NI contributions by 12% of the exchanged amount.

Some nice company may also pass on some/all of their NI savings to you/your pension contribution (mine don't).

AnotherJoe

Mine split the employers NI 50/50. Basically op it's a good thing more in pension less lost in deductions.

Paul_Herring

Imagine (for convenience) that you initially earned £25,000.
You'd have tax free allowances, and then start paying marginal rates of income tax and national insurance on the amounts above that.

Now imagine you get paid £26,000. All that extra £1,000 gets taxed and national insuranced at the normal rates:
£200 (of it) would be deducted for income tax
£120 (of it) would be deducted for national insurance.
Leaving you with £680 of that extra £1000.

So, lets pretend that the extra £1000 was a pay rise, and you want to put as much of it into a pension as possible, leaving you with the equivalent of what you got before when you were being paid £25,000...

If you put that after-tax £680 into your pension, you'd receive (25%) £170 rebate, resulting in £850 going into your pension.

This is what you describe as 'the normal way' in your post.

Note that you're only getting a rebate on income tax, on the remaining amount that was also NI'd, and you don't get a rebate on either NI, or the income tax on the amount of NI.

If, instead, you exchange (sacrifice) that £1,000 and get your employer to directly contribute it to your pension, £1000 goes into your pension, because it gets 'removed' from your pay even before the NI is calculated.

In both situations, you're still getting net-pay as if you were being paid £25,000, but "the normal way" ends up with £150 less going into your pension than salary exchange (or sacrifice.)

xylophone

https://www.aegon.co.uk/support/faq/Understanding-our-products/retirement-products/workplace-pensions/what-is-salary-sacrifice.html

Dinok

Thank you for all your responses. Makes more sense now.