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My work offers a salary sacrifice pension – should I sign up?

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My work offers a salary sacrifice pension - should I sign up?

My employer offers the possibility of paying my pension contribution via a salary sacrifice or salary exchange system.

They say this means I can contribute more to my pension, while still keeping the same salary each month. How does it work, is it worth signing up and are there any downsides?

What is the best option to grow my pension? BT

My work offers a salary sacrifice pension should I

Tax-efficient: salary sacrifice schemes mean you’ll pay less to national insurance

Harvey Dorset from This is Money responds: Getting the most out of your employer’s retirement plan is more important than ever to fund a comfortable retirement.

Many will already pay monthly into a defined contribution pension scheme through automatic enrolment.

However, you can do this in different ways. And if you have more than one option, there may be a more effective way to increase your pension, a salary sacrifice scheme is one way for savers to achieve this.

Offered by some employers, often large companies, salary sacrifice pension plans allow employees to forgo part of their salary, which is then paid directly by the employer into the employee’s pension.

Although this reduces your nominal earnings, it means that the part of your salary that you would normally pay into your pension after tax and then benefit from added tax relief, is instead paid before tax.

This represents a further saving, as it means that the employer and employee do not have to contribute to National Insurance on the amount of salary sacrificed for the pension.

Ultimately, salary sacrifice means your pension payment is exempt from both income tax and NI. In comparison, schemes where pension contributions are made after tax and where tax relief is claimed only recover the income tax element.

Salary sacrifice ultimately means you can get more in your pension for less.

This may seem like a win-win, but the downside is that those who sign up might lose some salary-related benefits, so that’s something to consider.

This is Money spoke to a pensions expert to find out if a salary sacrifice scheme could be the right move for you.

How does salary sacrifice work?

Not for everyone: Mark Futcher recommends checking with your employer to see if the program is best for you.

Not for everyone: Mark Futcher recommends checking with your employer to see if the program is best for you.

Not for everyone: Mark Futcher recommends checking with your employer to see if the program is best for you.

Mark Futcher, partner and head of defined contribution pensions at consultancy Barnett Waddingham responds: Salary swapping, also known as salary sacrifice, can be a good thing for employers to offer their staff – but it can be difficult to determine whether it’s the best option for you.

In a nutshell, salary sacrifice means you can make payments into your workplace pension scheme in a more tax-efficient way, providing National Insurance (NI) savings to both the employee and the ’employer.

It is important to know that this is a formal agreement between you and your employer, affecting your terms of employment in terms of pay and benefits.

With a ‘normal’ defined contribution occupational pension you receive an agreed contractual salary, but before it hits your bank account you pay a percentage into your occupational pension. Your employer also pays a percentage and the government tops it up.

With salary sacrifice, your contractual salary is reduced in exchange for employer contributions, rather than making payments directly as an employee payment. Since the salary is reduced, neither you nor your employer pays NOR on the amount of the salary exchanged.

Salary sacrifice cannot take your salary below the National Living Wage or National Minimum Wage, so you will be excluded if this is the case. There may also be a maximum limit to which you contribute, so as not to inadvertently bring you below certain NI limits, which could impact on your eligibility for certain state benefits.

The main benefit of paying via wage swap is reduced national insurance, and therefore a higher take-home pay. There is generally no impact on income tax.

If you are a higher rate taxpayer, paying via salary swap will mean there is no higher rate tax relief to claim on your payments, as you are not taxed on salary exchanged or sacrificed.

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Will you be able to afford the retirement you want?

The cost of a comfortable retirement has soared over the past year – but what do you need to get one and will you succeed?

As the Pension and Lifetime Savings Association updates its analysis of how much income people need for a basic, moderate or comfortable retirement, the This is Money podcast looks at what it all means for you.

Press play to listen to the episode above, or listen on Apple Podcasts, Audio boom, Youtube And Spotify or visit our This is the Money podcast page.

Salary sacrifice can give you more take-home pay

As an example, for an employee who earns £35,000 a year, contributing 5 per cent to their pension and receiving 5 per cent from their employer, their total pension contributions will be £3,500 anyway.

However, under the salary exchange method, take-home pay would increase by £140 over the year.

This example is based on the 2024/25 tax year. Please remember that tax treatment depends on your individual situation and may be subject to change in the future.

Salary sacrifice is not for everyone. If you’re unsure how this may impact you, it’s worth checking with your employer and they should be able to help you further.

As mentioned previously, some disadvantages may impact people on lower incomes or levels of state benefits, such as statutory maternity leave or disability benefits.

The recent spring budget announced that NI would cut from 10 per cent to 8 per cent from April 6, 2024.

This reduction will reduce the level of NI savings via wage trading, for those who are eligible.

Is salary sacrifice the best option for me?

Once you’ve verified that you’re eligible and won’t lose other salary-related benefits, there are three main reasons why salary sacrifice might be worth it for you.

Employer contributions: Some employers may pass on some of their NI savings from wage trading by paying more into your workplace pension, further increasing retirement savings. It’s worth asking your employer how this will impact their contribution level.

Compound growth: Higher contributions now will generate compound growth over time, like a snowball, due to dividends and interest rates. This means contributing earlier should leave you with a bigger retirement pot.

Family allowances/Universal creditt: As salary sacrifice reduces pay, this could increase the level of Universal Credit or increase the main entitlement to child benefit if you are eligible for these state benefits.

If you are worried or have any doubts, it is worth discussing your specific financial situation with a financial adviser or visiting the government’s ‘Money Helper’ website for more information.

Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free. We do not write articles to promote products. We do not allow any commercial relationships to affect our editorial independence.

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