Hear the word sacrifice and immediately we think we are being asked to give something away. Fortunately, this is one of those rare occasions where sacrificing a little can actually leave you better off.
Salary sacrifice allows you to exchange part of your salary or bonus for an employer pension contribution. Rather than receiving the money through your payslip and then paying it into your pension yourself, your employer pays it directly into your pension before Income Tax and National Insurance (NI) are deducted.
The benefits can be significant. Because the sacrificed salary is not subject to National Insurance, both you and your employer can make savings. Many employers choose to pass on some or even all of their own NI saving by making an additional pension contribution, giving your retirement savings an extra boost at no extra cost to you.
Salary sacrifice can be particularly valuable for higher and additional-rate taxpayers. It may also help parents reduce or avoid the High Income Child Benefit Charge, while those with income above £100,000 can reduce their taxable income and potentially restore some or all of their personal allowance.
However, there is a reason to keep an eye on future changes. Under the Government’s current proposals, from April 2029 the National Insurance advantages of salary sacrifice for pension contributions are expected to be reduced. Only the first £2,000 of earnings exchanged each tax year is currently expected to continue benefiting from the full NI exemption. Pension contributions above this level should still qualify for Income Tax relief, but the National Insurance savings are expected to be restricted. As always, these proposals could change before they are implemented.
Salary sacrifice is not suitable for everyone. A lower contractual salary may affect mortgage borrowing, life assurance, income protection or other workplace benefits if these are based on your salary. It is therefore important to understand the wider implications before making any changes.
Despite the proposed reforms, salary sacrifice is expected to remain one of the most effective ways to boost pension savings while reducing tax. Reviewing your options now could help you make the most of the current rules while ensuring your retirement planning remains on track for the years ahead.
If you would like to learn more about how to boost your pension then speak with one of our Wealth Strategists, who will be pleased to help you.
