Salary exchange: too good to be true?

02 Feb 2021

Salary Exchange (also known as Salary Sacrifice) has been around for many years and is the term used to describe an agreement where an employee give up some of their salary in return for a non-cash benefit. Generally, Salary Exchange has always been a great win for an employee as it has allowed them to ‘purchase’ certain benefits and take advantage of the preferrable tax position and NI position that Salary Exchange creates. Often, an employer would also benefit from an employee using Salary Exchange by way of a National Insurance saving.

As Salary Exchange grew in popularity over time, certain ‘non-standard’ items became the norm with employees having the ability to purchase mobile phones, IT equipment, accommodation, gym memberships, school fees and many more. In 2016, the then chancellor, Philip Hammond (remember him) announced that with effect from April 2017 the only allowable items that can be used for salary exchange purposes would be significantly reduced. These are:

  • Childcare Vouchers
  • Ultra-Low Emission vehicles
  • Cycle to work
  • Pension contributions

Mr Hammond never stated the reason for this change, but one can conclude that this was connected to HMRC losing out on National Insurance contributions and the generous system that was in place being abused by the few who ruined it for the many.

Whilst Childcare vouchers, Ultra-Emission vehicles and Cycle to work salary exchange schemes will be attractive to some based on their personal position, the only salary exchange scheme that could positively affect the majority of people is Pension contributions.

Every employer in the UK should now have a pension in place and will undoubtedly have members contributing into the plan of the employers choosing but does the employer use/allow salary exchange as a pension contribution basis?

Salary exchange is a tax efficient way for employers and employees to save money, potentially using the saving to improve any employee benefits offering provided to employees.  The main financial advantages are the National Insurance savings for both the employer and its employees with the employees also saving tax too.

Some employers are concerned about how hard it is to establish a salary exchange arrangement but please be assured, it can be a relatively straight forward process. The arrangement will need to be agreed by the employee as they are giving up an element of salary in lieu of an increased pension contribution and therefore there will be a need for contracts to be reviewed/amended using a side letter or an opt-out option. Advice from a legal adviser should always be sought to understand the most appropriate process for the employer. Once in place the arrangement can be offered to some or all your employees so long as their salary does not drop below the minimum wage.

From the employee’s perspective they do not need to adopt Salary Exchange as a pension contribution method and can chose to opt of it whilst remaining in the pension. Historically members have sometimes been sceptical about such arrangements and therefore the benefits to employees must be explained by experienced advisers. In the past, adopting salary exchange could have affected the borrowing ability of the employee for a mortgage but most mainstream lenders in the current climate will calculate lending based on the notional salary, i.e., the salary before the exchange.

In today’s climate where costs to the business and the businesses bottom line are key, there is certainly a conversation that needs to be had between advisers and employers around the pro’s and cons of salary exchange.

If you are an employer that falls into that bracket, please contact one of the team at Wingate Benefit Solutions on 01883 332260 or at



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Exclusively focused on UK organisations with employee headcounts of up to 1000, the data and conclusions shared in this report are directly relevant to companies of this size and profile.