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Using Salary Exchange to Improve Benefits

Whilst saving for retirement and providing life insurance for employees’ families are important benefits, given the current cost of living crisis providing benefits that have a more immediate impact for employees can add value to your overall employee benefits strategy.

Salary exchange is a great way for employers to improve their employee benefits package without increasing their total employment costs.

What is salary exchange?

Salary exchange is often used in connection with pension contributions. It is an agreement between the employer and their employees where the employee agrees to exchange part of their salary for an increased employer contribution.

The main advantage is that both the employer and employees save on National Insurance contributions. The NI savings can be used to increase the contributions paid into the employees’ pension plans leading to a bigger retirement fund. Alternatively, the NI savings can be used to both increases the employees take home pay and potentially add benefits that have a more immediate advantage for the employees.

The following table shows the potential annual savings in employer NI contributions:

Number of Pension Scheme Members 25, 100, 250
Total yearly salary payment before exchange £625,000, £2,500,000, £6,250,000
Total salary exchanged by employees (5%) £31,250, £125,000, £312,500
Employer NIC rate (2022/23) x15.05%, x15.05%, x15.05%
Employer annual NIC savings * £4,703.12, £18,812.50, £47,031.25

*Figures are based on an average salary of £25,000 per employee, each exchanging 5% of their salary for a pension contribution. Employer yearly savings are the NI contributions that would be paid without salary exchange in place.

Based on the above the average saving per employee for the employer is £188.12, which could be retained by the employer or used to provide an additional employee benefit. There is a wide range of employee benefits available, however, one option that has the potential to add a more immediate benefit would be to implement a Cash Plan.

What is a Cash Plan?

A Cash Plan is an insurance policy that can help cover the cost of everyday healthcare, such as visit to the dentist, opticians, physiotherapy, chiropody or buying prescription medication, by reimbursing an individual for some or all the costs.

The Cash Plan works on the basis that the employee pays for their treatment upfront and then sends the receipt to the insurer (many of which use mobile phone apps) who then reimburse the cost (up to the plan limit) within a week/10 days.

It is also worth noting that several Cash Plans provide access for employees to extra benefits, such as virtual GPs, stress/counselling helplines and retail discount schemes

There are a range of alternative policies available with different levels of benefits, however the premiums can be very competitive with plans starting from £1.00 per week.

By combining the use of salary exchange on the staff pension scheme it is possible to increase your employees’ net take home pay and add a benefit that offers an immediate saving to your employees without increasing your overall employment cost.

If you would like to discuss the options for using slaty exchange, want more information on Cash Plans or review your employee benefits strategy then please contact me.

This article should not be construed as advice. No action should be taken without seeking further formal advice.