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.
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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.
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