Salary exchange: opt in vs opt out

You might have heard about salary exchange (also known as salary sacrifice), a more tax efficient way to arrange your workplace pension. There are lots of reasons to switch over, including cost savings for you and your employees. But when making the switch, there are a few things to bear in mind to stay compliant. And, you can decide whether to ask your employees to opt in or opt out of the arrangement. In this article, we’ll tell you more about opt in vs opt out, and help you decide which might be right for your company.

What is salary exchange?

Salary exchange is a change to the way pension contributions are made by you and your employees. Rather than being paid after tax, employee contributions are taken before tax, in the form of a reduction in salary. You will then pay the full contribution on your employee’s behalf. Because the money is taken from the salary before tax, both you and the employee will save money on National Insurance contributions. It’s a win-win scenario, freeing up extra cash that you might decide to re-invest in the business or share with your employees in the form of higher pension contributions, or additional benefits.

When you make the switch to salary exchange, you need to gather informed consent from your employees. You cannot legally force anyone into this arrangement. You must also give your employees clear information about what salary exchange is and the implications for them. Then, you can conduct the switch in two different ways: asking your employees to opt in, or asking them to opt out within a set consultation period.

Asking employees to opt in

You can ask your employees to opt in once you have given them the relevant information about salary exchange. You will need to collect their written consent (and store this in case it needs to be checked in future), and prepare a contract addendum. Using a third-party software like Maji can make this process much quicker and easier!

Asking employees to opt out

Alternatively, you can ask employees to opt out during a set consultation period (no legal minimum but we recommend at least a few weeks to give people the chance to understand the process). You will need to notify your employees about the consultation, give them the relevant information about salary exchange, provide a means to opt out and collect and store their responses. You will also need to collect some other paperwork to prove you have carried out the switch in a compliant way. Whilst you can do this manually, working with a third party like Maji can again make this quicker and easier to accomplish.

New joiners

When new employees join your company, you can either have them choose to opt into salary exchange once you’ve added them to the company pension, or you can give them the choice to opt out. As before, you will need to provide information, give them adequate notice and collect and store their response.

Which one is right for my company?

You can choose which way to switch your arrangement.

The main advantage of asking employees to opt out is that it usually generates a much higher conversion rate amongst staff into the scheme (with Maji, usually around 90% of the employees will go into the scheme).

Running the switch as an opt-in arrangement will usually require some chasing of your employees to remind them to do this by the agreed date, and this can create quite a bit more work for you, with (typically) a much lower return on investment.

Although running the consultation period can involve some more admin in terms of sending the required information and defining the dates, with someone else like Maji to handle the process, you won't need to worry about the paperwork or setting up the consultation framework.

When thinking about what method might be best for your company, you’ll want to consider your team, the relationship you have with them, and which approach you think they will respond to the best.

Next steps

Maji can support you in making the switch to salary exchange and makes running an opt-out consultation easy and effective. Our digital solution makes compliance a breeze, plus takes care of informing and engaging your employees. Plus, when you subscribe to Maji, you’ll also get a suite of premium tools and resources to embed your company pension into a holistic financial wellbeing strategy.