What is salary exchange?

By THIS IS MONEY
Updated:

 

OUR company's stakeholder adviser is encouraging us to contribute via a salary exchange scheme. What is this scheme? Is it worth considering? AH, Stoke on Trent.

Jon Briggs, independent financial adviser at Chartwell Investments says: A salary exchange scheme is more commonly referred to as 'salary sacrifice' and it means that the employee sacrifices part of their salary and a similar amount is paid into their pension by the employer.

Because less salary is being paid the employer they will pay less employer's NI and it may be possible to negotiate with the employer that some or all of this saving also gets invested into the pension.

An additional advantage for higher rate taxpayers is that they get instant higher rate tax relief as the income on which they pay higher rate tax is being reduced.

But note that there must be no contractual obligation on behalf of the employer to pay into a pension simply because you sacrifice some salary. The two operations are separate and you must therefore trust your employer to pay into your pension as expected. Another downside is that as you sacrifice salary you are also reducing the maximum amount you can pay into a pension.

As everyone eligible can now pay up to £3,600 per annum this does not present a problem for many people.

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