Sacrifice your salary for a bigger pension
Paying into your pension through the salary sacrifice scheme could boost not only the size of your pension pot, but also your take home pay. We explain how to make salary sacrifice pensions work for you.
![Stacks of coins with saplings growing on top](https://cdn.mos.cms.futurecdn.net/6zvqvDmapnJCAhh5SFwcs4-415-80.jpg)
If you are looking to get more from your pension contributions, then the salary sacrifice scheme could be the answer.
The salary sacrifice scheme is backed by the government, and allows you to give up a portion of your salary ‒ or ‘sacrifice’ it ‒ in exchange for some form of non-cash benefit.
Because you are then earning a lower salary, both you and the employer then pay a smaller level of National Insurance contributions. Potentially, depending on where your income sits compared with the income tax thresholds, you could actually take home more money as a result of making use of the salary sacrifice scheme.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But crucially, you can also use the salary sacrifice scheme to build a bigger pension.
Pension contributions and the salary sacrifice scheme
Pension contributions are just one reason people might opt into a salary sacrifice programme. Alternative options might be for employees to sacrifice some of their salary in exchange for childcare vouchers, gym memberships or for a bike through the Cycle to Work scheme.
However, pension contributions are one of the most common uses of salary sacrifice.
Let’s take an example, outlined by the pensions experts at Penfold, of an employee who earns £50,000 a year and pays 5% of that salary ‒ £2,500 ‒ into their pension pot over the year as part of the workplace pension scheme.
That is then topped up by 3% from the employer, meaning total contributions of £4,000. After pension contribution and tax are taken into account, the employee takes home £36,022.40 a year.
Now, if they instead opted to pay £2,500 into their pension through salary sacrifice, the level of pension contributions would be unchanged at £4,000. However, because of the reduced tax considerations, their net annual pay would be £300 higher at £36,322.40.
In addition, the employer would see their own National Insurance bill drop by £345.
Some employers offer to pay their National Insurance saving into the employee’s pension pot, providing an additional boost. That would mean that not only did you boost your take-home pay, but you’d also enjoy a higher level of contributions into your pension, potentially resulting in a more substantial pension pot when you do eventually retire.
Is salary sacrifice for pension contributions right for me?
There are obvious benefits to using the salary sacrifice scheme in order to make pension contributions ‒ the potential to not only increase your take home pay, but also save more into your pension pot.
However, it won’t be right for everyone and there are some downsides to consider.
For example, reducing your salary in this way may impact the size of any mortgage you may wish to borrow. Mortgage lenders use your annual salary as one of the factors when considering the upper limit of what they may be prepared to offer you, rather than just your take-home pay.
As a result, using the salary sacrifice scheme in order to make pension contributions could reduce the maximum mortgage on offer.
In addition, your employer may offer life insurance to employees and their beneficiaries. The payout is generally calculated as a multiple of your annual salary, and so again salary sacrifice would reduce the amount being paid should you pass away.
It could also impact your eligibility to certain benefits which are worked out based on your income, such as statutory maternity pay.
Ultimately, it will come down to your own personal circumstances as to whether making pension contributions through salary sacrifice is a good idea or not.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.
-
Tesla and Alphabet announce results – should you invest in Big Tech?
How profitable are the world’s biggest tech companies? We share the latest so far this earnings season.
By Katie Williams Published
-
How working part-time in retirement could boost your pension by £87,000
Easing into retirement by working a few days a week could add thousands to your pension pot. We crunch the figures to see how working part-time can boost your pension po
By Ruth Emery Published
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings account
Ulster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
By Marc Shoffman Last updated
-
Moneybox raises market-leading cash ISA to 5%
Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
By Ruth Emery Published
-
October NS&I Premium Bonds winners - check now to see what you won
NS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
By Kalpana Fitzpatrick Published
-
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
-
Bank of Baroda closes doors to UK retail banking
After almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
By Vaishali Varu Published
-
The best options to earn cashback on spending
From credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend.
By John Fitzsimons Published
-
Should you retire abroad?
Check the regulations governing pension savings carefully before you decide to retire abroad.
By David Prosser Published
-
John Lewis mulls buy now, pay later scheme
The CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
By Pedro Gonçalves Published