Glossary · UK

What is Salary Exchange?

An arrangement where an employee gives up salary in return for an employer pension contribution.

Full Definition

Salary exchange (also called salary sacrifice) is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit — most commonly an increased employer pension contribution. Because the exchanged amount is never paid as salary, it escapes both employee Income Tax and National Insurance, and the employer also saves Employer National Insurance, some or all of which is often passed on as an extra pension contribution. It requires a formal contractual variation and can affect salary-linked benefits such as mortgage affordability assessments, statutory pay and means-tested benefits.