Pension salary exchange (PSE) represents a great way for businesses to lessen the impact of ongoing economic and recruitment challenges. By introducing PSE, a business will benefit from annual savings it can then use to enhance its staff reward package to help attract and retain key talent.
 
For any businesses that do not currently operate PSE, it’s a worthwhile consideration. Given it offers savings for the business for reinvestment and provides extra net pay for employees, it’s often a win-win opportunity.

 
How does pension salary exchange work?

PSE works by changing the way the current employer/employee pension contributions are paid. Effectively the employee’s salary is reduced (and their employee contribution stops) in exchange for increased employer contributions. This creates National Insurance contribution (NIC) savings for both employer (at 13.8%) and employee (at 10%/2% depending on salary level), which can be used in a number of ways:

• To increase employee net pay
• To increase overall pension contributions
• To enhance staff benefits provisions

Depending on employee numbers, salary levels and the type of pension scheme, savings for businesses can run into the £10,000s. There’s also a typical take home increase for employees between £10 and £25 per month depending on salary level and marginal NIC rate.  

 
Pension scheme review and staff benefits

It’s often the case that a PSE may also involve a review of the existing staff pension scheme. This is a crucial activity, as it ensures that the provider in place is providing the business and its employees with the most appropriate scheme.
 
As noted, savings generated through a PSE can be reinvested in enhancing staff reward packages. Examples may include introducing death in service cover, private medical insurance, cycle to work schemes, electric vehicle schemes, cashback plans or discount vouchers.
 
The Employee Benefits team within our sister company Azets Wealth Management are on hand to assist with reviewing existing pension scheme arrangements and advising on expanding staff benefits options. The initial consultant to review your existing benefits is without charge. 

Auto enrolment 2: Qualifying earnings pension scheme changes

In September 2023, key changes were announced for qualifying earnings (QE) pension schemes (dubbed ‘auto enrolment 2’0), including:

• The removal of the lower earnings threshold for QE schemes – which means that the first £6,240 of earnings (that to this point has not been pensionable) will become pensionable
• The age from which auto enrolment pension schemes must be offered to staff reduces from 22 to 18

Businesses with QE schemes will suffer additional costs when these changes are applied. However, depending on salary levels, we calculate that introducing PSE alongside these changes should, in many cases, reduce the overall cost impact and may even create a net saving. 
 
Any business that has a QE pension scheme and doesn’t currently operate PSE, it makes sense for them to consider introducing PSE as soon as possible.
 
It is important to note that no salary exchange scheme can take an employee's earnings below National Minimum Wage levels, so it will be important to check for any such employees first.

There has been no official confirmed date of when this change will take place, however, the likelihood is this will occur in the 2025/26 tax year, given a change of this magnitude would be difficult to implement quickly.