Many employers since the advent of auto enrolment have with Government approval used Salary Exchange in combination with their Workplace Pension Scheme.
Effectively Salary Exchange is where an employer pays the employees’ pension contribution into the workplace pension in exchange for the employees accepting a reduction in gross salary for an equivalent amount. This can be particularly beneficial as both the employer and employee reduce their National Insurance contribution and employees can obtain their tax relief upon their contributions at their highest marginal rate without the need to correspond with HMRC.
However, while there can be many benefits to implementing Salary Exchange challenges can occur.
Employers no longer need to have their Salary Exchange schemes approved by HMRC, so there is no commencement or ‘sense check’ from an outside source unless Employee Benefit Advisers or Consultants are in place before it goes live. Although HMRC is not required to approve a scheme in advance of implementation they still have the authority to request any schemes that are incorrectly implemented (i.e. where contractual documents have not been issued) are ‘unwound’. This can involve a lot of additional administration time to put right any wrongs such as collecting back National Insurance contributions before reverting to the standard contribution relief at source format.
In addition to National Insurance and tax relief benefits, the key point is that the introduction of Salary Exchange will result in an amendment to the employees’ contract of employment rather than purely being an HMRC tax adjustment. Therefore, any decision to utilise the reduction in salary in exchange for a commensurately increased employer pension contribution must be correctly documented, evidenced and legal advice should be sought. Whether you are responsible as an employer for managing a team of 200 or 20,000 the right advice and adequate time for consultation and implementation is highly recommended.
It is important to be aware that Salary Exchange will not be suitable for all employees. Amongst others, examples of those not suited to Salary Exchange includes employees in receipt of certain government or social security benefits, or those in receipt of the national minimum/living wage. Even national PLC’s have been inadvertently caught out on this aspect. An annual audit from your employee benefits team to ensure that all aspects remain compliant and difficult situations can be avoided is advisable.
In addition to having sufficient resource within a business to manage the implementation, other factors can affect the successful running of a salary exchange scheme for example; the pension wage definition selected to be used for auto enrolment, and whether new job holders are correctly integrated into salary exchange during their process of auto enrolment.
Salary Exchange if correctly implemented and run provides a range of benefits for employers and their employees.