What is Salary Exchange and how are savings made?
Salary exchange is an arrangement where the employee agrees to give up part of their salary for an agreed period in exchange for some kind of non-cash benefit, such as the loan of a bicycle, the lease of a low emissions vehicle or childcare.
As salary exchange is taken from the gross salary rather than net pay it means the employee makes savings by paying less income tax and National Insurance.
Please see below the worked example of an employee with a monthly gross salary of £2,500 who exchanges £243 each month in return for childcare vouchers.
|Without Salary Exchange (benefit deducted from net pay)||With Salary Exchange (benefit deducted from gross salary. Based on 1100L taxcode)|
|Basic Monthly Salary||£2500||Basic Monthly Salary||£2500|
|Less Income Tax (£316.52)||£2183.48||Less Benefit (£243)||£2257|
|Less National Insurance (£219.36)||£1964.12||Less Income Tax (267.92)||£1989.08|
|Less Benefit (£243)||£1721.12||Less National Insurance (£168.35)||£1798.88|
|Net Monthly Pay (take home)||£1721.12||Net Monthly Pay (take home)||£1798.88|
This employee is making a net monthly saving of £77.76. They are receiving £243 of childcare vouchers each month for an actual cost of £168.65 as a result of tax and national insurance savings from salary exchange arrangements.
Please note: You cannot reduce your gross salary (i.e. your pay before tax and national insurance deductions) below the national minimum wage as a result of all combined salary exchange arrangements. You are advised not to reduce your gross salary below the level for paying National Insurance Contributions (£7,755 per annum).
What benefits are available through Salary Exchange?
The University currently offers the following benefits through salary exchange arrangements:
Can I change the SX pay reduction?
To meet the requirements of HM Revenue & Customs, a salary sacrifice is expected to be a permanent reduction in pay.
You will not be permitted to change your SX pay reduction amount unless one of the following ‘life-changing’ events occurs:
- pregnancy/maternity or adoption leave
- extended sickness absence
- reduction in working hours
- redundancy of partner
- for childcare voucher: significant change in childcare arrangements (eg child moving from pre-school nursery to school); child reaches the age of 16
- death of child/partner
For each SX scheme operating in the University, there is an annual "window" each year when you can make changes to the amount of your SX reduction for other reasons.
See the HMRC website for a more detailed explanation of salary exchange.