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Salary Exchange – A Simple Way To Help Your Employees With The Cost of Living Crisis

According to a recent research briefing, UK’s annual inflation rate reached 9.9% and 10.1 % in August and September 2022, respectively. Similarly, 93% of young people in Great Britain reported an increase in their cost of living in 2022 compared to 2021. So, it will be no surprise that many people in the UK are struggling with paying their bills and are finding ways to adapt by cutting back on their expenses.

Of course, this also means businesses are likely to suffer from the adverse effects of the increasing cost of living in the UK. We all know the most obvious way to support employees financially is to increase their pay. However, this may not always be possible, especially when businesses are under financial pressure. Whilst ensuring you are paying your employees fairly and providing the lowest earners with enough to live comfortably will improve employee relations, here at Pay Check, we are big fans of salary exchange and the benefits it brings to employees and businesses.

First of all, what is salary exchange?

Salary exchange is sometimes referred to as salary sacrifice and is essentially an agreement between a business and an employee to reduce pre-tax salary in return for receiving a benefit. These benefits come in the form of goods and services such as childcare, transport, healthcare or additional pension contributions.

Most salary sacrifice schemes have to be offered to all employees, however, these are voluntary benefits, and employees can opt in and out.

What are the advantages of salary exchange?

There are many benefits to salary exchange, including:

How do salary exchange schemes work?

As an employer, before you decide what salary exchange schemes you wish to offer your staff, you must agree the cash value of each benefit to ensure employees are receiving goods or services to the value of their loss of income.

It is important to remember that any arrangement agreed with employees should not bring your employees' earnings below National Minimum Wage (NMW), so procedures must be put in place to ensure salary deductions keep wages above NMW rates.

Reduced tax and National Insurance contributions

Salary sacrifices are taken from pre-tax salary; therefore, income tax and National Insurance are saved on the sacrificed amount.

For example, if an employee is paid £500 per week and sacrifices £50 of this for their car, National Insurance and tax only applies to £450 of this income.

Employers also make savings on National Insurance contributions when their staff take up a salary exchange. However, employers must consider that the reporting process for non-cash benefits is different to the process for cash earnings. At the end of the year, benefits must be reported online to HMRC through the end-of-year P11D expenses and benefits form, something many businesses choose to outsource to organisations like Pay Check due to the demanding workload required over a short period of time.
More affordable living costs

With households feeling the pinch, it is getting harder for everyone to afford essentials, and many are trying to make cuts where possible. Introducing a salary exchange scheme can help with the financial strain by offering staff non-cash benefits on which they pay less tax and National Insurance, helping them save money.

High-priced items such as cars or bikes are made more affordable by allowing employees to spread the cost across pay cycles rather than paying upfront or taking out loans or finance deals.

Why should employers offer salary exchange?

Take up of salary exchange schemes on both sides are notoriously low, and much of this has to do with a misunderstanding of how they work. Offering salary exchange schemes, if communicated properly, can be a huge benefit that employers can offer their employees, allowing them to access services that may otherwise be unaffordable to them.

Running payroll when salary exchange is offered

There has never been a more critical time to ensure your payroll is timely and accurate so as not to cause additional stress to your employees. Running payroll can be a complex, never-ending task to accommodate in-house, which is why many businesses have adopted outsourced payroll services. This way, not only do your employees benefit by having their salary and benefits paid accurately and when they are due, but employers are safe in the knowledge that all is taken care of.

If you are new to salary exchange, it might seem like a daunting prospect to have to consider this within your payroll processes, and this is where outsourcing payroll can help. Above all, employees getting paid as and when due is paramount, which is why payroll outsourcing is your go-to for managing payroll processes to ensure that your employees are paid fairly, accurately, and on time. So why not contact Pay Check now for unrivalled payroll management services?


This article was written by
The Pay Check Team
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