Salary exchange arrangements represent a highly efficient means of achieving significant National Insurance Contribution (NIC) savings for both the employer and employee on the contributions made to pension arrangements.  

Employee and Employer NICs are calculated based upon employees’ salaries prior to contributions being remitted to pension arrangements. The threshold at which employer NICs commence will rise by £21 a week above indexation from April 2011.  At face value, this should reduce employers’ NIC bills.  However, these savings will be offset by the increase in NICs that are being applied as at April 2011. In fact, both employee and employer NICs will increase by 1% at all levels, increasing employment costs and reducing employees’ take-home pay.  

But, if contributions are made on a Salary Exchange basis, both the employee and employer NICs can be ‘saved’ on the value of the contribution, reducing employment costs and increasing employees’ take-home pay.  

In the example below, we illustrate the savings that Salary Exchange can generate based upon an individual earning £30,000 p.a. and making various levels of contributions from 6 April 2011.  We have assumed that the individual is not contracted-out of the State Second Pension Scheme: