Salary exchange (or salary sacrifice) makes the payment of pension contributions more efficient for both employers and employees, by reducing the amount of National Insurance (NI) contributions payable.
Employees agree to a reduction in salary equal to their pension contributions, and in return the employer makes an additional contribution to the scheme equal to the salary given up.
NI contributions are based on overall earnings, so a lower salary produces NI savings for both employer and employee.
The contribution paid to the pension scheme remains unchanged, but the employee benefits from higher take-home pay and the employer pays less NI.
Some employers use a proportion of their NI saving to enhance benefits for employees, resulting in improved benefits for staff.
