National Insurance savings could turbo-charge your pension by £87,000

Millions of workers are benefitting from a cut in National Insurance, after the government lowered the basic rate from 12% to 10% on 6 January.

Someone earning £30,000 will save £349 a year, while high earners can save a maximum of £754.

The National Insurance cut was announced by the chancellor in last year’s Autumn Statement.

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It may be tempting to use the savings as extra spending money, but new figures reveal how squirrelling the cash away into a pension could boost your nest egg by almost £100,000 by the time you retire.

“If you’re able to prioritise long-term savings, then you could consider using the money you get each month [from National Insurance being reduced to 10%] to top up your pension contributions - even small additional contributions now could give you a big retirement boost,” says Dean Butler, managing director for retail direct at Standard Life.

In addition, you can use salary sacrifice to save even more National Insurance - and turbo-charge your pension further if you add those savings to your retirement pot.

We explain how National Insurance savings can increase your pension and help you achieve a more comfortable retirement, and how salary sacrifice works.

How the National Insurance cut can boost your pension pot

MoneyWeek asked Standard Life to crunch the figures showing how much the National Insurance savings could add to the pension pot for someone earning £50,000.

An employee on a £50,000 salary will save £749 a year from the drop in National Insurance. This works out as £62.41 a month.

If a 22-year-old put that money into a pension until she turned 66 - in other words, over a 44-year timeframe - she could get a staggering £87,000 extra in retirement.

So, at age 66, she would have a nest egg worth £553,000. This compares to £466,000 if she hadn’t chosen to add the £62.41 monthly contribution to her pension pot.

The calculations assume a 5% employee contribution, 3% employer contribution, 5% annual investment growth and 1% annual fee.

For someone earning £30,000, the figures are lower, but she could still boost her pension by £41,000. By diverting the £29 monthly saving from the National Insurance cut into a pension, she would amass a nest egg worth £320,000 by retirement, compared to £279,000 if she didn’t add the £29 contribution.

How to make further savings with salary sacrifice

You can save even more National Insurance by using salary sacrifice - and give your pension a further boost in the process.

Pension salary sacrifice works by the employee agreeing to reduce their salary and their employer agreeing to increase their contributions to the employee’s pension by the same amount. 

The benefit for the employee is that they will save National Insurance as well as income tax on their pension payments, giving them more take-home pay.

Alice Guy, head of pensions and savings at Interactive Investor, comments: “With a rising tax burden, finding ways to save tax and keep more of your wealth are particularly valuable. Despite National Insurance falling to 10%, the reality is that frozen tax thresholds are making us all poorer as even lower and middle earners will pay more tax overall in 2024 as their wages rise with inflation.”

She says that using salary sacrifice to make pension contributions is a “win-win for both employees and employers”. 

Guy explains: “It allows you to save on National Insurance as well as income tax, potentially saving up to 10% extra tax on pension contributions. And employers can save 13.8% employers’ National Insurance because the pension payment under a salary sacrifice arrangement isn’t officially counted as part of the employees’ pay.”

A middle earner on £30,000 could save £150 National Insurance each year by using salary sacrifice, while a high earner on £50,000 could save £250 each year.

If the £150 was put into a pension every year, over 40 years it could add up to an additional £31,072 in the worker’s pension pot, according to Interactive Investor. For someone on a £50,000 salary, stashing the £250 National Insurance annual saving into a pension could be worth a massive £51,565 in 40 years’ time.

Some employers also agree to pay the extra tax saved into their employees’ pensions, giving a further significant boost to their employee’s pension wealth. When taking account of these additional employer pension contributions, someone earning £30,000 could see their pension grow by £65,283 over 40 years, while a high earner on £50,000 could turbo-charge their retirement pot by £108,752.

Guy notes: “Salary sacrifice is a great way to reduce your tax burden with no extra cost. If you invest the National Insurance that you would have otherwise paid over 40 years, you could end up with a significant boost to your long-term wealth, taking you one step closer to a comfortable retirement.”