There’s no denying that the last few years have been turbulent, with the cost-of-living crisis affecting millions up and down the country. Rising inflation and soaring energy bills, alongside increased food prices and housing costs, has put significant pressure on households. Could it be time to start thinking about salary sacrifice to boost your retirement savings?
It has been particularly challenging for those planning for retirement. With increased everyday costs and inflation eating into savings, many people are finding that their retirement plans are no longer as secure as they once thought. According to research conducted by LiveMore, 26% of people aged between 50-79 have been forced to postpone their retirement. 23% of those surveyed are seriously considering delaying their retirement, with a further 7% taking on a second job. If you are concerned about your retirement planning, we have put together a handy blog as to why now is the time to speak to a financial adviser.
So, in these tough economic times, what if there was a way you could boost your retirement funds whilst slashing the amount of tax you pay? That’s where salary sacrifice comes in.
How does salary sacrifice work?
Firstly, what is salary sacrifice? Well, it is a government backed scheme where an employee agrees to give up part of their salary in exchange for certain non-cash benefits provided by the employer.
You can use salary sacrifice to make pension contributions, offering potential tax savings. This is because the salary is reduced before tax is calculated, resulting in a lower amount of income tax and National Insurance contributions paid by the employee. There is no set limit on how much salary you can sacrifice.
Typically, pension contributions are made through a system called “net pay”. This means that your pension contributions are taken from your salary before income tax is applied, since pension contributions are exempt from income tax. Even if you contribute after paying income tax, you can still claim tax relief on that amount.
However, under the net pay arrangement, the money is contributed to your pension after National Insurance Contributions (NICs) are calculated. While pension contributions are free from income tax, they are not entirely tax-free because you still pay NICs on the full amount of your salary.
With salary sacrifice, on the other hand, the money is never considered part of your salary at all. As a result, the sacrificed portion is not subject to either income tax or NICs. This means that by using salary sacrifice for your pension contributions, you save on both types of tax, making it a more tax-efficient option than standard contributions.
This is just one of the many ways you can reduce your tax and maximise your savings. You can find out more essential tax planning tips here with our handy guide.
What are the benefits of salary sacrifice?
It is true that the scheme offers benefits to the employer, but realistically it’s more about the gains you can receive from it that really matter.
Firstly, as touched upon, salary sacrifice can lead to lower National Insurance contributions for employees, which allows you to keep more of your earnings. As such not only is it an affective way to increase take-home pay, but it also means you can save more for your future.
The scheme also offers you a way to reduce your tax liability. By lowering your gross salary through salary sacrifice, you can reduce your income tax liability. Therefore, overall, you can potentially save money on your tax bill.
You could also find that participating in salary sacrifice could affect your eligibility for certain tax credits or benefits, such as Working Tax Credit or Child Benefit.
If you would like to learn more about salary sacrifice and how it is a sound tax-efficient way to boost your pension pot, you can read our handy blog piece by clicking this link.
Furthermore, there are also other non-cash benefits available that you may not be otherwise able to afford. These vary from cycle to work schemes, a company car and a gym membership to home computers and childcare vouchers.
To find out how much you could save using salary sacrifice you can use this calculator from moneyBeans.
Downsides of salary sacrifice
Nothing is ever perfect, is it? There are some fantastic benefits on offer from the salary sacrifice scheme, however there are also pitfalls to be wary of.
That’s because it can have an influence on anything that is linked to your salary.
You need to be mindful on the impact it can cause on any other benefits you may be entitled to. Salary sacrifice may reduce your right to benefits that are based on your salary, such as overtime pay, bonuses, or redundancy payments.
Secondly, it can have an effect on your credit score and therefore your ability to borrow. The reason being that your gross salary will appear lower, therefore making it harder for you to provide income when applying for a loan or mortgage. However, a letter explaining the salary sacrifice arrangement can often clarify this for lenders.
Additionally, it reduces your flexibility as agreements are typically binding for a set period, limiting your ability to change the arrangement if your circumstances were to change unexpectedly.
You could also consider that if you plan include a death in service policy it could pay out less if your salary is lower due to salary sacrifice.
Of course, there is a lot to digest and weigh up before deciding if using salary sacrifice is the right course of action is for you. Sometimes you just need a helping hand.
Reeves Independent is here to help you navigate tough financial decisions, standing by your side every step of the way. We simplify complex jargon and offer clear, understandable financial advice, empowering you to take control and achieve your retirement goals.
Take the first steps in your retirement journey today by booking your free, no obligation pension review.
