4 salary exchange myths busted

If you read our recent article about three reasons to put a salary exchange scheme in place now, you’ll know all about the imminent adjustments to employer National Insurance (NI). You’ll also understand why these rate changes mean that now is a great time to consider a salary exchange scheme for your business.

You might, though, still be unsure if it’s the right choice for you.

As a business owner, you have a lot on your plate and many priorities vying for your attention. Maybe you have valid reasons for delaying a move to salary exchange or you simply haven’t had time. Equally, your decision-making might be clouded by some prevalent salary exchange myths.

Keep reading for just three of the most common and a closer look at why they simply aren’t true.

1. Salary exchange reduces your staff’s take-home pay

Opting for salary sacrifice effectively lowers your employee’s salary in “exchange” for a benefit, in this case, a pension contribution. But this doesn’t mean that their take-home pay is necessarily reduced – in fact, it is more likely to rise.

A decrease in salary means that your employees will have less National Insurance to pay (and your employer NI bill is reduced) and it could lower their Income Tax bill too. The combination of these factors should increase your workers’ take-home pay.

Far from putting workers off, this knowledge could position salary exchange as an invaluable employee benefit, potentially helping to improve pension engagement among your staff, as well as overall team morale.

The important point here is that the benefits of salary exchange need to be communicated effectively to ensure maximum take-up. Read ‘Why communication is key to selling your company's hidden benefits’ for more help in this area.

2. Your employees' borrowing potential and means-tested benefits could be affected

One important area of salary exchange that is often misrepresented concerns its effect on your employees’ borrowing potential and eligibility for means-tested benefits.

Historically, it was understood that lowering your salary (even intentionally) would make you more of a risk for lenders and so affect your chance of getting a competitive mortgage, for example.

This is broadly no longer the case with most lenders aware of salary exchange and more than willing to consider it.

Your employees’ entitlement to state benefits like Statutory Maternity Pay could be affected but only if the exchanged salary means they fall below the level at which they pay NI. This will need to be considered on a case-by-case basis and is something that we can help you with at Parker FA.

3. It’s only for high earners so might not benefit my staff

Salary exchange is available to all your employees, as long as the amount they sacrifice wouldn’t take their pay below minimum wage (£12.21 an hour for employees over the age of 21 from April 2025).

This makes salary exchange an important incentive for workers across your business.

That said, you will see the greatest NI savings as an employer if your company’s higher earners join the scheme, so be sure to target every department of your business.

4. It’s a one-time deal that requires no further action

Putting a salary exchange scheme in place can be complicated, which is why it’s usually advisable to speak to workplace pension experts like Parker FA first. We can offer guidance and reassurance to you, your employees, and key personnel, like HR and finance managers, freeing the latter up to concentrate on what they do best.

Salary sacrifice affects your employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law, so this reassurance could prove invaluable, helping to reduce your liability where complicated regulations are concerned.

But the hard work doesn’t end once the scheme is in place. It needs constant managing and we can help here too. From onboarding new employees to keeping track of amounts as salaries change, we can offer ongoing guidance. Get in touch to see how our team of professionals can help you.

Get in touch

With tax year end approaching and changes to personal tax thresholds and employer NI rates imminent, now is the perfect time to get your finances in order. Contact us now to talk about what we can do for you.

Please note

This article is for general information only and does not constitute financial advice which should be based on your individual circumstances. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. Workplace pensions are regulated by The Pension Regulator.

It is important to note that salary sacrifice is not suitable for all employees. Employees’ pre-tax salary will be reduced. This may affect their entitlement to State Benefits.

Note that salary sacrifice arrangements should be appropriately documented with the employee signing an agreement letter unless it is written into the employment contract. In addition, you would need to ensure that your employee payslips can display the amount of the salary exchanged.