A salary exchange is an arrangement where employees can choose to lose some of their wage in return for a non-cash benefit. Often referred to as a salary sacrifice, there are various reasons for doing so although much depends on your personal circumstances.

Before the exchange can be considered, a few regulations must be adhered to. You can’t reduce an employee’s earnings below the minimum wage, the benefits involved should be tax free, and a suitable pension scheme must be in place (for more information on workplace pensions, read our post about the duties you have as an employer). The HMRC also require details of the new contractual arrangement – for full terms, you can visit the gov.uk page here.  

As with any arrangement of this nature, it’s advised that specialised legal advice is sought before a deal is struck. If you’re still undecided about the benefits of a salary exchange, as both an employer and employee, here are the most relevant pros and cons.

Salary Exchange Pros


Most salary exchanges are done to boost retirement funds. Once the employee decides on a figure, this amount is then paid into a pension plan as an employer contribution. For those in a comfortable financial position, this strategy will make more sense for long-term security.


Because part of the salary is being deferred, neither employee or employer will have to pay National Insurance Contributions (NICs) on the exchanged amount.


Not only can employees opt-in or opt-out of a salary exchange at any time, they can also increase or decrease the amount they sacrifice. This provides added financial freedom, perhaps if a short-term cash injection is needed.

piggy bank funds salary exchange

Image credit: Alfy on Flickr

Other Benefits

As well as the potential financial reward for conducting a salary exchange, other benefits include: childcare vouchers, work-related training schemes, company cars and parking spaces. Staff should enquire with their boss about which benefits are available.

Salary Exchange Cons

Possible Restrictions

Although a salary exchange is at the behest of the employee, they must adhere to the contract of employment designated by the company. In some cases, this contract may restrict changes to salary, especially at short notice.

No Short Service Refunds

Because contributions are classed as ‘employer’, any short service refunds – where you receive money back from a workplace pension scheme – are not permitted.

Not Guaranteed

Exchanging money from your salary into a pension scheme isn’t a fool proof strategy. The value of investments can fall depending on external economic factors and the conditions of your plan.

Negative Possibilities

Reducing your salary may impact on other benefits, such as overtime rate or redundancy payments. Likewise, your state pension, child tax credits or sick-pay may be affected too. Also consider if a reduced gross salary will infringe on any mortgage repayments.

A salary exchange isn’t something to approach without due diligence. Employers will face an administrative impact, whilst the employee may also lose out on certain benefits. However, with an agreement contract and legal advice in place, the sacrifice will help reduce NIC contributions and increase pension plans in the long run. For more advice on such an undertaking, please feel free to get in touch with us today.

If you’re suffering from a seasonal slump in sales, take a look at our top tips to stay profitable during the quiet times.