Salary Exchange

Salary Exchange – What does this mean?

When you pay into a workplace pension, one way to do this is for your pension contribution to be deducted from your salary - this receives tax relief, ...but you pay national insurance on the contribution amount.

Another way is with salary exchange – this means your pension contributions are taken before you pay national insurance and income tax, ...so you pay less national insurance and income tax on your remaining salary.. Let’s have a look at a payslip to see how it works.

For example, say you have a before tax salary of £24,000 and you put £1200 (5%) a year of your salary into your pension without the salary exchange option.

 

As you can see, you actually only pay £960 a year into your pension, as you get 20% tax relief from the government, so that makes up the £1200 total going into your pension a year. (This doesn’t include any employer contribution).

Ater your pension, tax and national insurance have been deducted, your take home pay here gives you: £18,895.84 a year.

 

If you were to take the salary exchange option and you put: £1,411.76 a year into your pension, this means your salary is lower - so you pay less on income tax and national insurance. This means your take home pay is the same and you get £211.76 more going into your savings.

Your employer will save too, as they won’t have to pay national insurance on the amount that goes into your pension. Employers may even pass their NI savings onto you - meaning more money going into your savings.

If you are a higher rate taxpayer, you’ll get tax relief on your contributions immediately, so you won’t have to reclaim this through your tax return.

 

You will need to be aware though that since your monthly salary will be less, this could effect your entitlement to the State Pension, Statutory Maternity Pay or Life Cover.

 

Like any financial decision, salary exchange is not suitable for everyone, so you should speak to your employer to see how salary exchange could work for you.

If you don’t already have an adviser, you may be able to find one under www.unbiased.co.uk. You may be charged for this advice.

You can also speak to us here at Aviva. We have dedicated advisers on hand to answer your questions and help you decide if this will benefit you enough.