Salary sacrifice to maximise your take-home pay and pension

Not everyone is aware of the positive impact of salary sacrifice plans on pensions — which is precisely why a lot of employees in the United Kingdom may be overlooking this pension tax benefit.

Salary sacrificing is a tax-efficient approach to saving for retirement, as it can help you potentially save hundreds of pounds. With a standard occupational pension plan, you can deduct your savings contributions from your pay and obtain income tax relief of up to 45% (applies to the highest earners).

Salary sacrifice plans require you to forgo a portion of your salary that you would have contributed to the pension plan directly in exchange for your employer paying for the cost of your contribution.

In essence, salary sacrificing is a means to contribute to your workplace pension that lowers your official salary but may increase your take-home pay. It provides the same tax benefits as traditional occupational-pension schemes.

How It Works

The portion of your pay that’s contributed to your workplace pension may vary based on the scheme. But for the sake of simplicity, let’s use the typical auto enrolment percentages that apply.

You would have to contribute 5% of your salary to your pension under a conventional auto-enrolment plan, and you would get tax relief on your contributions. Tax relief would be given at 20% if you pay taxes at the basic rate.

A salary sacrifice pension plan reduces your official income by the amount you would have paid into a traditional pension plan. Your company will then make a contribution (to your pension) equivalent to the 5% you would have made from your salary. They would also contribute an additional 3% of your salary’s worth, bringing the amount up to 8%, which is what’s required by auto-enrolment regulations.

Suppose your initial pay is £30,000. Your official income would drop from £30,000 to £28,500 (with £1,500 being equivalent to 5% of your salary) in a salary sacrifice plan.

The £1,500 you ‘sacrificed’ would go into your pension account through your employer. This would be in addition to your employer’s own payment into your pension, which is required by auto-enrolment laws to be at least 3% (equivalent to £900) of your salary.

Both conventional pension schemes and salary sacrificing typically result in the exact same amount of money going into your pension plan.

However, the latter has one significant advantage: You won’t have to pay national insurance contributions on the salary you forgo — and this can save you up to 13.25%. And since your employer doesn’t have to pay employers’ national insurance on this money, it also saves money. (It typically contributes 15.05% of the employee’s compensation.)

Therefore, an individual making £30,000 would have a total pension contribution of 8% or £2,400 whether or not they salary sacrifice. The amount of income tax due is also the same (i.e., £3,186).

However, the salary sacrifice option would result in lower national insurance costs, which would increase your take-home pay by roughly £200 annually. You also have the option of using your national insurance savings to boost your total pension pot.

Opt for a Salary Sacrifice

Salary sacrifice programs offer good value to most employees.

If you have the choice to take part in such an arrangement, do so to either increase your take-home pay or your pension. It’s a win-win either way.



If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.

(Feedsy Exclusive)


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Categories: Pension