Salary sacrifice allows you to exchange some of your salary for a non-cash benefit, such as pension contributions – and it can actually increase your take-home pay as it reduces how much tax you pay
One man has explained how he has boosted his pension pot by around £9,000 a year by opting into a workplace scheme.
Caleb, 31, who works as an IT manager in London, uses salary sacrifice to exchange some of his salary for pension contributions. As well as increasing your retirement pot, salary sacrifice also reduces your tax bill, as the deduction is taken from your gross salary.
This means you may find your take-home pay actually goes up. However, you should be aware of the potential impactions of salary sacrifice if you are taking out credit.
For example, mortgage lenders often calculate your affordability based on your gross salary, so a lower salary might reduce the amount you can borrow.
Caleb said: “I’ve opted into a salary exchange scheme primarily for the pension tax benefits and National Insurance savings. It’s been a smart move financially, and I’ve noticed the long-term gains in my pension contributions without affecting my take-home pay much.
“The opt-in process was fairly straightforward. My employer had clear steps laid out, and the HR system made it easy to enroll. There were no major complications.
“Our HR team provided a simple guide explaining how salary exchange works and the benefits. They were also available for any questions, which helped clarify the impact on payslips and pension growth.“
New figures from Scottish Widows show workers could boost their pension pots by £41,200 by opting into salary sacrifice. Someone with an average salary of £37,430 would increase their pension pot by £528 a year.
For a worker aged 30 and retiring at age 67, and assuming 5% investment growth, this would add £41,200 to their pension savings by the time they retire.
Susan Hope, Scottish Widows Retirement Expert, commented: “Questions loom over the future of salary exchange, despite it being the best way to maximise workers’ retirement savings.
“Cutting or abolishing it completely would ignore the long-term boost it delivers to people’s finances. Our data shows not only the positive impact on people’s take home pay, and pension wealth, but also the halo effect it has on people’s financial confidence.
“The term ‘salary sacrifice’ is a red herring because neither the employer nor employee has to give anything up when they take advantage of this scheme. It’s truly a win win.
“The key to unlocking additional savings into pensions is awareness, and this needs improving so schemes like salary exchange can positively impact more people’s finances. We should be empowering our workforce’s future and salary exchange is one way to do this.”