Should you sacrifice your salary for a bigger pension?

UK notes and coins sit next to a calculator on a wooden table (image: Getty Images)

Is salary sacrifice the right option for you? It could help boost your pension (image: Getty Images)

(Image credit: Getty Images)

last updated 16 September 2024

If you are looking to get more from your pension contributions, salary sacrifice could be the answer.

Backed by the government, the scheme 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.

And, depending on how your income relates to income tax thresholds, you could actually take home more money as a result of making use of salary sacrifice. In a world of fiscal drag, this could be an attractive option to those who find that threshold freezes have propelled them into a higher tax band.

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Crucially, salary sacrifice could also boost your pension. This is especially valuable given the cost of a comfortable retirement is soaring and the tax wrapper pension contributions offer. So, is salary sacrifice the right option for you? We've taken a look.

Pension contributions and the salary sacrifice scheme

Pension contributions are one of the most popular reasons why people opt into a salary sacrifice programme. Other sacrifice schemes include those for health insurance, gym memberships or for a bike through the Cycle to Work scheme.

But say you go for pensions contributions over these other things, how much could you expect to gain? The pensions experts at Penfold have crunched the numbers.

Take the example of an employee who earns £50,000 a year and pays 5% of that salary ‒ £2,500 ‒ into their tax-free pension pot as part of a workplace pension scheme. This figure is then topped up by 3% - the legal minimum under auto-enrolment law - from the employer, meaning total contributions rise to £4,000 a year. After pension contributions 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 voluntary salary sacrifice, the level of pension contributions would be unchanged at £4,000. However, because of their 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 contributions 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. This would ultimately result 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. Not only could you increase your take home pay, but you could also save more into your pension pot.

However, there are some downsides to consider. Cutting your salary 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.

Additionally, if your employer offers life insurance to employees and their beneficiaries, you could cut the pay-out your loved ones receive in the event of your death. This is because the total pay-out is generally calculated as a multiple of your annual salary.

Another thing to consider is the impact on your eligibility for benefits that are based on your income. For example, statutory maternity pay.

So, whether or not salary sacrifice is the right decision for you will depend on your circumstances. But, given the tax benefits on offer, it is certainly an attractive option for those who can do it.

Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV.

Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years.

After moving to NationalWorld.com - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.