Salary Exchange

One of the complaints of employers regarding Automatic Enrolment is the cost. Many businesses have only just started to recover from the recession and are concerned about the impact of Automatic Enrolment on their profitability.

By putting in place a salary exchange arrangement, there is a cost saving to be made. This works by the employee “exchanging” salary for pension contributions.

The only caveat to remember here is that employees cannot be paid less than the National Minimum Wage, so avoid this route where this could be a danger.

Higher and Additional Rate Tax Relief

A benefit of Salary Exchange is that of additional tax relief for higher and additional rate taxpayers. Under a normal arrangement for a Group Personal Pension deduction, a higher and additional rate taxpayer would have their premium, net of basic rate tax deducted from their salary. They would then need to claim back additional tax relief via a tax return.

Not all people in these tax brackets complete a tax return so are missing out on this extra tax relief. When salary exchange is being operated, because the contribution is taken off before tax and national insurance, the saving is immediate.