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Why you should consider pension salary sacrifice (if your employer offers it)

Written by: Rebecca Goodman
Pension savers could be £200 on average better off per year by using a salary sacrifice scheme, research reveals.

More than half of Brits (54%) said they can’t save or invest as they want to because of rising prices. Recent hikes to National Insurance, which increased 1.25p this month, have made matters worse, according to 38% of those polled.

But salary sacrifice can make pension savings more tax-efficient and could add a collective £1.9bn to the UK’s pension savings at a time of soaring inflation amid the cost-of-living crisis which is squeezing personal finances.

Businesses can also benefit from using salary sacrifice schemes, as it reduces the amount of employer’s National Insurance they have to pay. By not offering this they are collectively losing out on £2.1bn according to the research from pension provider Cushon.

What is salary sacrifice?

Salary sacrifice schemes are when employees get a lower salary in return for a benefit or perk such as travel or childcare. While it sounds like you’re giving up on part of your salary (and makes your salary look lower), it actually means an employee pays less income tax, and both the worker and employer pay less National Insurance.

It can also be used for pension contributions so an employee agrees to reduce their salary by the amount they want to contribute to their pension, and their employer will then pay their total pension contributions, saving both money in lower National Insurance contributions.

Take-home pay is actually higher due to the National Insurance saving, while the amount going into the pension remains the same.

According to Cushon, a worker earning £30,000 a year could save £200 a year in NICs, rising to £330 if they earn £50,000.

Yet despite the savings, 63% of those polled said they weren’t aware of salary sacrifice. Of those that are, just a third (34%) who had a Defined Contribution pension used it.

Four in ten (38%) of the 2,000 surveyed didn’t know if salary sacrifice was offered by their employer or not.

Reasons for not choosing salary sacrifice included it sounding too complicated (24%), people misunderstanding how it works and thinking they would lose out on pay by opting for it (30%), and 20% thought it could affect their creditworthiness.

While a quarter said the term salary sacrifice didn’t sound positive, 18% didn’t want to use it because it would make their income go down ‘on paper’.

Is salary sacrifice suitable for you?

The first thing you need to check is whether your employer offers salary sacrifice in the first place as not all do. However, it may not be suitable for everyone, such as those who are applying for a mortgage and need to show their income.

Low-income workers are also unlikely to benefit and it’s not possible if it reduces earnings to below the minimum wage. A lower salary could also impact on entitlements to benefits such as maternity pay.

Before choosing salary sacrifice, you can ask your employer to calculate exactly how it might affect your income and finances.

Ben Pollard, CEO and founder of Cushon said: “Salary sacrifice is a simple way for people paying into workplace pension schemes to save hundreds of pounds each year just by changing the way their contributions are made.

“If their employer uses salary sacrifice for their pension contributions, people pay less National Insurance on their overall salary, while their take-home pay is actually higher and their pension contributions are unaffected.

“It’s worrying that there are currently so many employers who are not offering this option. Employers are now facing a 9% increase in National Insurance costs. If more employers were to use salary sacrifice, not only would they benefit their bottom line, but they could be helping their employees’ financial wellbeing.”

Former pensions minister, Baroness Ros Altmann, said: “Those people who are able to access salary sacrifice through their employer but choose not to take it up are missing out on ‘free money’ from the government.

“As so often in pensions, the terminology is a major problem here. To most people sacrifice means giving something up rather than gaining anything extra.

“This is another example of how confusing and complex terminology can hamper people’s ability to make the most of their pension savings. We need clear, jargon-free language and a concerted effort from government, industry and employers to help people better understand and engage with their pensions, so savers can make the most of their money.”

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