Salary exchange schemes a 'win/win' amid growing financial pressures

Salary exchange schemes for workplace pensions could help employers unlock “significant cost savings” in national insurance (NI) contributions of around £20,700 each year and simultaneously boost pension pots, according to analysis by Scottish Widows.

The research revealed that nearly two-thirds (64 per cent) of employers were worried about the forthcoming increase in NI contributions, with 29 per cent claiming that this will have a direct impact on employees’ pay, whilst 21 per cent expect pay increases to be frozen completely for the whole year.

However, Scottish Widows suggested that many employers could mitigate against this rise by utilising salary exchange schemes for their workplace pensions.

Employees' pension pots would also be boosted through the use of these schemes, with the provider's analysis revealing that employees on a salary of £30,000 could receive up to £42,100 extra in their pension pots at retirement.

Under salary exchange schemes, employers and employees agree a reduction in the gross salary in return for the employer covering their share of pension contributions, reducing the NI contributions for both the employer and employee.

Indeed, according to the analysis, a UK employer with 100 staff on salaries of £30,000 could immediately save an estimated £20,7000 in NI contributions each year by implementing a salary exchange agreement.

The research also suggested that this potential saving will be even greater after 1 April, when NI is due to increase by 1.25 per cent, with employers using salary exchange arrangements estimated to save an extra £22,575 in NI contributions from April 2022.

Despite this, the firm found that around 29 per cent of employers are failing to utilise salary exchange schemes.

Commenting on the findings, Scottish Widows retirement expert, Robert Cochran, acknowledged that this can be a complex subject for employers to grapple with, clarifying however, that there is help at hand from financial advisers.

He stated: “Many UK firms are facing rising inflation and running costs, disrupted supply chains and a looming rise in National Insurance contributions.

“For individuals, the current economic situation is equally challenging, with living costs such as energy bills and fuel prices rising sharply, meaning their take home pay is stretched increasingly thin. In extreme cases, the planned NI increase could also see some high-earning consumers being taxed as much as 60 per cent of their earnings.

“Workplace salary exchange schemes can play a part in off-setting some of these financial pressures, both for employers and their workforce.

“All UK employers are required by law to provide a pension scheme for their employees, so there is a real opportunity for them to also implement a salary exchange scheme which would give them more control over their NI contributions and a chance to markedly improve their employees’ financial wellbeing.

“While this can be a complex subject to grapple with, there is help at hand from financial advisers who can clearly articulate the benefits to both employer and employee.”

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