1. What is Salary Exchange?

Salary exchange (or salary sacrifice) is an arrangement where employees give up part of their salary in exchange for non-cash benefits like pension contributions. This reduces National Insurance contributions for both employer and employee.

2. How Net Pay is Calculated

The calculator uses the following formula:

Where:

• Income Tax — Calculated based on UK tax bands (0% up to £12,570, 20% up to £50,270, etc.)
• National Insurance — 12% on earnings between £12,570-£50,270, 2% above £50,270
• Salary Sacrifice — Pension contribution amount

3. Benefits of Salary Sacrifice

Details: Salary sacrifice can reduce your taxable income, lowering your Income Tax and National Insurance contributions while increasing your pension savings.

4. Using the Calculator

Tips: Enter your annual gross salary and pension contribution amount. The calculator will show your estimated Income Tax, National Insurance, and net pay after salary sacrifice.

5. Frequently Asked Questions (FAQ)

Q1: How does salary sacrifice affect my take-home pay?
A: It reduces your taxable income, which can lower your tax and NI payments, potentially increasing your net pay compared to regular pension contributions.

Q2: Are there limits to salary sacrifice?
A: Yes, your reduced salary must not fall below the National Minimum Wage. Pension contributions through salary sacrifice are limited by the annual allowance (£60,000 in 2024-25).

Q3: Does salary sacrifice affect my state pension?
A: It could affect your entitlement if it reduces your NI contributions below the qualifying threshold for state pension.

Q4: Can I opt out of salary sacrifice?
A: This depends on your employer's scheme. Some allow opting out, while others require you to stay in for a fixed period.

Q5: Are all pension contributions tax-free?
A: Contributions are tax-free up to certain limits. You get tax relief on contributions up to 100% of your earnings or £60,000 (whichever is lower).