What’s a Salary Sacrifice Pension Plan?

Salary Sacrifice Pension Plans: A Great Way to Save and Invest

If you’re not on an Elon Musk or Rihanna’s financial wavelength, making smart financial decisions when you’re in your 20s & 30s is essential if you need to retire wealthy. It’s imperative if you’re looking forward to retiring at all. In 2020, the rate of adults aged 60 & above who filed for bankruptcy tripled since 1991. The data received further highlights a harsh reality since many UK residents aren’t ready for the financial constraints that come with a lack of proper preparation for retirement. Retiring as a millionaire isn’t easy since you have to make a million sacrifices. However, it’s not entirely impossible. There has been a remarkable boost in the percentage of millionaire retirees in the UK since the 90s. With all this said though, what should one do to ensure they hit their retirement dreams or be on the same wavelength as Kylie Jenner? Well, one of the most worthwhile investments you can make is paying into a pension fund. Here’s a detailed guide on one of the best pension schemes – the salary sacrifice pension scheme. Find out how it works, the benefits you can receive & what you should consider before taking the pension plan.
What’s A Salary Sacrifice Pension Plan

How Does Salary Sacrifice Work?

Most employers provide their staff with salary sacrifice pension schemes, offering them a chance to exchange a part of their income for a non-capital benefit like childcare vouchers, a company vehicle and a motorcycle. The pension plan can also be known as the ‘salary exchange pension scheme‘, and one of the key benefits of taking it is increasing the pension contributions.

Salary Sacrifice Pension Plan Explained

Salary Sacrifice Pension Plan Explained

A salary sacrifice pension scheme enables you to use the cash you pay into your National Insurance Contributions and income tax¹ to top up your retirement income and ensure you receive a significant amount over time.

Imagine this:

Due to the regular savings you make with this scheme, the pension contributions made are more tax-efficient than any personal contributions you’d make into your pension fund. With the salary sacrifice system, you can typically make the same amount of pension contributions for a reduced overall fee or a higher level of contributions at a similar cost rate.

One thing to consider is that,

Not every employee is eligible for the salary sacrifice pension scheme, and if you receive a low income, it might not be possible to reduce your income further. Your salary will have to be more than the set national minimum revenue after you take advantage of this form of pension contribution.

It can be established via a contractual agreement with your boss. Nevertheless, you have to be able to opt out of the pension scheme at any time, provided that you pay any outstanding balances. The salary sacrifice pensions come at no extra cost to you or your boss, and there are various tax benefits for you and your employer.

Salary Sacrifice Benefits

Salary Sacrifice Benefits

The salary sacrifice pension scheme only works for you and your boss if the perks involved are tax-free. These typically include:

  • Company vehicles
  • Cycle to work plans
  • Childcare vouchers
  • Vehicle parking near your workplace
  • Job-related training
  • Supplementary employer pension contributions

Salary Sacrifice and Tax

As per the salary sacrifice pension rules, when you sacrifice a part of your revenue through the salary sacrifice pension plan, you’ll automatically pay less tax and the National Insurance Contributions on your total income. Your boss will also save some capital since they don’t have to pay the Employers ‘National Insurance Contributions on the part of your salary that you give up. Moreover, they might pass some or all these pension savings to you.

Salary Sacrifice Pension Tax Relief

The private contributions you make to your pension scheme are entitled to tax relief from the state. The typical amount of tax relief you get is a 25% tax top-up for the pensioners in the basic rate taxpayer band. That means that when you put £100 into your pension fund, the HMRC1 will effectively include another £25. Therefore, your pension pot will have £125.

When you make your contributions to your pension, your pension provider will claim the tax top-up for you and include it into your pension fund automatically. If you belong to the higher-rate taxpayer band, you’ll have to claim some additional tax relief via the self-assessment tax return form.

What does this mean for you?

Any pension contributions you make through the salary sacrifice pension scheme are excluded from tax relief since you’ll have already profited from lowered tax on your lower income amount. For that reason, you don’t have to complete a salary sacrifice tax return and can’t claim any tax relief.

If you, however, want to see how much you’ll receive after getting tax relief, you can use the salary sacrifice pension calculator, which will offer you an estimate of the amount you’ll get.

Things to Consider Before Taking A Salary Sacrifice

Things to Consider Before Taking A Salary Sacrifice

While there are numerous benefits to taking the salary sacrifice pension UK, there are some things you need to look into before taking the retirement plan.

First, when you decide to take a lower salary amount, the level of benefits you get from your boss might also reduce. For instance, if you’re eligible for medical benefits or holiday pay, the amount you were supposed to receive might be reduced. If you’re also planning to request an extended leave period, or claim paternity or maternity leave, you might not get as much as you’ll require.

Let me explain:

Suppose you choose to sacrifice a percentage of your income and get a reduced payment for an extended period. In that case, you might inevitably affect your capability to claim a state pension scheme later on. To be eligible for the new state pension scheme you’ll have to pay National Insurance Contributions2 (or attained eligible National Insurance credits) for about ten years. To get the full state pension amount, however, you’ll have to pay the National Insurance contributions for almost 35 years. 

Got Questions? Check These First

Is the Salary Sacrifice Pension A Good Idea?

What Are the Cons of the Salary Sacrifice Plan?

Does Salary Sacrifice Go On Tax Return?

What’s the Salary Sacrifice Pension?

In conclusion

It all adds up to this:

The benefits of salary sacrifice pension plans are clear. If you can afford to give up some cash now, it will be worth the wait when it comes time for retirement. Paying less tax on your income and having more money in your pocket today is a win-win.

Search

Your Journey to Financial Success Starts Here