Salary exchange (also called salary sacrifice or salary swap) is one of those tax-saving strategies that’s completely HMRC-approved. It allows employees to swap a portion of their salary for a non-cash benefit – like pension contributions, an electric car, healthcare, or childcare – and in return, pay less tax and National Insurance (NI).
It sounds great, and in most cases, it is. But there are rules to follow and potential downsides to consider. So, is a salary exchange scheme right for you? Let’s find out.
What is salary exchange?
A salary exchange scheme is an agreement between an employer and an employee to reduce the employee’s salary in exchange for a benefit.
Because salary is subject to tax and National Insurance, while some benefits are wholly or partially tax-free, shifting part of an employee’s salary into benefits can mean big savings for both employees and employers.
The most common salary exchange benefits include:
✔ Pension contributions
✔ Electric vehicles (EVs)
✔ Cycle-to-work schemes
✔ Healthcare and gym memberships
✔ Childcare schemes
But beware!
There’s one big restriction: a salary exchange arrangement can’t reduce an employee’s cash earnings below the National Minimum Wage. If an employee is earning close to the minimum wage, they won’t qualify.
With April 2025’s National Minimum Wage increase, an employee working 40 hours per week must earn at least £25,397 per year – so anyone earning close to this amount might not be eligible for salary exchange.
| Are you eligible for tax savings through salary exchange? Email us at [email protected]. We can help! |
Is salary exchange worth it for employees?
For most employees, yes. The biggest advantage is the savings on NI contributions.
By sacrificing salary for a non-cash benefit, employees:
- Pay less National Insurance – meaning you hold on to more of your earnings and trim your tax bill.
- Get more value from their income – especially for pension contributions, where tax relief applies.
*But, again, if an employee is on minimum wage, they won’t be able to participate due to HMRC rules.
How much could employees save?
Here’s an example of how much an employee can save through a salary exchange scheme for pension contributions:
| Annual salary | Monthly salary | Pension contribution per month | NI saving per month | NI saving per year |
| £25,000 | £2,083.33 | £78.17 | £7.82 | £93.80 * |
| £35,000 | £2,916.67 | £119.83 | £11.98 | £143.80 |
| £45,000 | £3,750.00 | £161.50 | £16.15 | £193.80 |
| £55,000 | £4,583.33 | £183.46 | £3.67 | £44.03 ** |
| £65,000 | £5,416.67 | £272.00 | £5.44 | £65.28 ** |
Key things to note:
* From April 2025, the national minimum wage for a 40 hour week employee will be £25,397- so this calculation assumes they work less hours than that! Or they can’t benefit from a salary exchange.
** If you earn over £50,270, your NI saving is lower because NI rates drop above this threshold.
*** The bigger the pension contribution, the bigger the tax and NI savings.
What are the advantages of a salary exchange scheme?
The main advantages of salary exchange are:
✔ Employees save on NI contributions
✔ Employees get tax relief on the money they add to their pension
✔ Employers save on NI contributions
For pension contributions, this is a no-brainer – more money ends up in the employee’s pension pot rather than going to HMRC.
For electric cars, employees get a heavily discounted lease and employers can offer EVs at a low cost.
What are the disadvantages of a salary exchange scheme?
The downside of salary exchange is that it reduces an employee’s official salary.
For pension salary exchange, the impact is usually small, but for car salary sacrifice (which involves a bigger salary reduction), the effects could be more noticeable.
This can affect:
- Life insurance benefits (if linked to salary)
- Mortgage affordability (lenders look at gross salary)
- Statutory maternity pay (which is based on pre-tax salary)
- Credit limits for loans and credit cards
- Eligibility for some state benefits
Another key point: pension contributions made through salary exchange are classed as employer contributions. This means employees can’t ask for a refund if they later decide to opt out of auto-enrolment.
Can employees change their mind?
Yes – but not whenever they want.
HMRC guidance states that employees can only opt out in certain circumstances, such as:
- A change in personal circumstances (e.g., a financial change that makes the arrangement unsuitable)
- A change in employment circumstances
- With employer approval
This means employees do have some flexibility, but it’s important to think carefully before signing up.
Is salary exchange worth it?
For pensions, absolutely – it’s a simple, tax-efficient way to boost savings.
For electric cars, it’s also a great option for many employees, as it reduces the cost of leasing an EV significantly.
For other benefits, it depends on personal circumstances.
Want to explore salary exchange for your business?
At JVCA, the friendly accountants, we help businesses set up salary exchange schemes that:
✔ Save tax for both employers and employees
✔ Ensure compliance with HMRC and employment law
✔ Handle payroll adjustments for a smooth processEmail us at [email protected] to find out how salary exchange could work for you.
