SMART Pensions – the facts

03 April 2019

Saving with salary exchange for SMART pensions

SMART pensions is a way to reduce employment costs for employers, while maintaining or enhancing employees’ pension benefits.

This idea has been around for a number of years, however, as part of the introduction of the Optional Remuneration legislation, it was confirmed that the use of salary exchange for pension savings would continue to benefit from tax and NIC relief.

If you haven’t already introduced SMART pensions, now is the time to consider implementation of this NIC efficient pension arrangement.

What savings can be achieved?

Savings are dependent on a number of factors, in particular the number of participating employees, the average earnings level and the amount of employee pension contributions. This table shows estimated totals for employer and employee savings available for 2019/20, assuming an employee makes a 5% pension contribution and exchanges current salary in favour of additional employer pension contributions.

Average salary

Number of employees and total combined annual NIC savings

















How does it work?

The employees’ contributions are replaced by enhanced employer contributions. At the same time, the employees agree to a reduction in annual salary equal to the value of the enhanced contributions.

As employer pension contributions are both tax and NIC efficient while employees’ contributions are only tax-efficient, exchanging salary for an increased employer pension contribution in this way ensures that the whole pension contribution is NIC-efficient. In addition, there is an employer NIC saving on the salary exchange. Therefore, both employer and employee make NIC savings.

SMART pensions are fully compatible with auto-enrolment and can be implemented as a stand alone arrangement or as part of a wider flexible benefits offering.

What will an employer need to consider?

If your organisation is liable to pay the Apprenticeship Levy, SMART pensions reduces the paybill on which the Levy is calculated.

Salary exchange is a simple concept but careful implementation is the key to avoiding the pitfalls which could render the arrangements ineffective and successfully realising maximum savings.

Our team has extensive experience in implementing SMART pensions. We work with employment lawyers and pension advisers to address all relevant issues from design and documentation to agreeing the tax and NIC impacts with HMRC and even employee communication.

Your next steps

For help and advice please speak to your usual BDO adviser or contact Shawn Healy.