How salary sacrifice saves tax and boosts pensions
What is salary sacrifice, and does it really boost your pension pot? Employees can receive a range of benefits from employers, but there are many pros and cons that should be carefully considered.
Salary sacrifice is when you agree to swap some of your salary for benefits. This can be child care vouchers, a company car scheme or additional pension contributions.
The latter option has major implications for your retirement years. Each month extra funds go into the pension pot. The earlier you start, the more you benefit in the long term.
If you are in a good financial position, salary sacrifice is a tax-efficient way to boost your pension.
How does salary sacrifice happen?
Salary sacrifice schemes are commonplace. Employers usually make them easily accessible. You give up part of your salary and your employer returns non-cash benefits.
Because you receive less pay, you pay less tax and less National Insurance.
There are immediate benefits for your employer. They will not have to pay Employers’ National Insurance contributions on the amount you give up. In some cases, employers pass on part or all of these savings to you.
It’s a great perk that benefits your future retirement plans, and everyone wins!
Salary sacrifice is tax efficient. Alongside regular contributions, it’s the best way to maximise your pension pot.
When can you sacrifice salary?
The most common time is after a pay rise. If you already have enough cash each month, divert the additional amount to your pension fund.
This depends on personal circumstances. Are the bills covered? Crucially, have you got a big ticket item planned in the coming months?
It’s all about balance. If other financial considerations are taken care of, getting an increase in salary is the perfect opportunity to increase the investment in your future.
Alternatively, Christmas bonus payments, or one-off rewards or commissions are great opportunities. With agreement from the employer, funds can be diverted to maximise pension funding and minimise tax paid.
Salary sacrifice advice
Your employer should always offer to help you understand how a salary sacrifice could impact you and your earnings. Also, they should highlight how other things could be affected.
It’s worth doing the calculations that show how salary sacrifice would alter your take home pay. Also, highlight the taxes you pay and the total amount that will be diverted to your pension savings.
How we can help
How you realise your future plans and dreams is an important decision. That’s where we come in. We can help by offering you professional, independent advice to allow you to understand your options. To talk to us about salary sacrifice and to help you decide if it’s right for you, call us on 0808 123 4321 and we can arrange a no obligation meeting at our expense.
Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.