Are you missing out on a valuable pensions tax perk that could save you hundreds of pounds? Research from Mercer, a consultant, suggests that a fifth of employees are failing to sign up for salary-sacrifice arrangements, even though these could be a more tax-efficient way to save for retirement.
In a traditional occupational-pension scheme, you make contributions to your savings out of your pay, claiming income-tax relief at your highest marginal rate of tax – up to 45% for the highest earners.
Salary-sacrifice schemes offer exactly the same tax relief, but require you to forego the proportion of your salary you would have paid into the pension scheme; instead, your employer then covers the cost of your contribution.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
Exactly the same amount of cash ends up in your pension scheme either way, but the latter arrangement has one big advantage: there will be no national insurance contributions to pay on the salary you’ve sacrificed – that’s a saving of up to 13.25% on this cash. Your employer also makes a saving, since it doesn’t have to pay employers’ national insurance on this money. Normally, its contribution is 15.05% of salary.
These are valuable perks. Mercer says someone earning £40,000 a year and paying 6% of pay into their pension scheme would save £318 in national insurance contributions annually in a salary-sacrifice set-up. Their employer would save an additional £361 each year.
Not all employers currently offer salary-sacrifice arrangements, but given the tax advantages to them of doing so, take-up is increasing. The schemes don’t have to be used only for pensions. Other non-cash benefits, such as childcare vouchers, can also be offered in this way.
The two key downsides to salary sacrifice schemes
There are some potential disadvantages for employees to consider. By joining a salary-sacrifice scheme, you are lowering your salary. You’re not losing out financially because the reduction is only what you would have paid into your pension scheme, but the lower figure is the one that will be used for other important calculations.
One example is your life insurance. Many employers offer death-in-service benefits to the value of a multiple of your salary, so a lower salary means you’ll qualify for less cover. Your entitlement to certain state benefits, such as statutory maternity pay, could be reduced for the same reason.
Similarly, if you plan to apply for a mortgage in the near future, remember that banks and building societies will decide how much they are prepared to lend you partly on the basis of your earnings. So a reduced salary could decrease the size of the mortgage you can secure.
These considerations aside, however, salary-sacrifice schemes offer a good deal for the majority of employees given the national-insurance saving. If you have the option of joining such an arrangement, think hard before saying no – and if your employer doesn’t currently offer salary-sacrifice, it’s worth pointing out the tax advantages to them of putting one in place.
-
Should you switch your pension fund?Many pension fund options are poor performers, thanks partly to high charges. Is it worth switching?
-
What pension providers don't tell you about your retirement moneyCheck the small print from your pension provider or risk losing thousands.
-
Are lifestyle funds still fit for purpose?Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
-
What is the state pension triple lock?Explainer The UK state pension triple lock is loved by pensioners but hated by economists. But what is the triple lock - and what does its future hold?
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Midlife MOT: what is it and who can get one?The government has launched an online midlife MOT to help older workers with financial planning, health guidance and career skills. But how does it work, who can get one and would you pass it?
-
Small pension pots to be consolidated, says DWPWorkplace pension schemes worth less than £1,000 that become “deferred” when a saver changes jobs will be consolidated under a new system
-
Retiring abroad: What to consider, from tax to pensionsThe high cost of living makes many people consider retiring abroad. We look at what you need to consider, including tax and pensions.
