IF you’re wanting to boost your pension, then you may want to know whether your employer offers a salary sacrifice scheme.
These schemes are an agreement between you and your company, where your employer agrees to reduce your cash pay for non-cash benefits.
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You can use this scheme to boost your pension and lower your tax bill – but how does it work? We explain all you need to know.
What is a salary sacrifice scheme?
A salary sacrifice scheme is where a worker agrees for a chunk of their earnings to be put into a tax-free benfit.
Often, these include benefits like a childcare vouchers, gym membership or a cycle to work scheme.
You don’t pay tax on the portion of your wages that goes towards paying for these schemes, lowering the amount of income tax you pay overall.
Can I use it to boost my pension?
Your employer may have a scheme in place where you can use a salary sacrifice scheme to put towards your pension.
The money you agree to take off your salary will be put into a pension scheme – and your employer will contribute to this pot too.
One of the main advantages of using this scheme is that you pay less in tax like national insurance, and the full amount you’ve sacrificed will be put into your pension.
This is because as you are earning a lower salary, both you and your company will pay less in National Insurance Contributions (NIC) – and it means that your take home pay will actually be higher.
How much National Insurance you pay depends on how much you earn per week or month.
You pay nothing on the first £184 of weekly earnings, 12% on weekly earnings between £184 and £967 and 2% on weekly earnings of £967 or more.
Companies pay 13.8% of your salary if it’s between £8,840 and £50,270.
Low Incomes Tax Reform Group (LITRG) gives an example of how the scheme would reduce your NIC.
Dave has joined a salary sacrifice scheme, and he earns £11,500 a year, paying 12% in NIC on his earnings over £184 a week.
He gives up £5.15 of his salary per week, and only has to pay £3.84 in NIC – down from £4.46 if he hadn’t enrolled in the scheme.
His take home pay is 41p less, but he’s made a 62p saving in NIC.
That £5.15 then goes straight into his pension pot.
You can use Legal & General’s salary sacrifice calculator to see how this could work for you.
Should I use a salary sacrifice scheme?
Although sacrificing your salary could be concerning if you’re on a lower income, remember that you pay less in income tax and National Insurance.
Which? says that if you sacrifice £1,000 for example, you won’t be losing this entire amount overall – you’ll be losing less than £70 a month in income tax alone if you’re a basic rate tax payer.
If your financial situation changes, you can also choose to opt out of the salary sacrifice scheme – or reduce the amount of money you’re taking out of your pay.
However, it’s not available to everyone – if it reduces your earnings below the minimum wage, you won’t be eligible/
The minimum wage stands at £8.91.
If you’re planning on buying a home anytime soon, you might want to consider if the scheme is right for you.
Lenders will base how much they’re willing to give to you on your salary – if this is lower, than the amount you can take out for a mortgage will also be lower.
Certain state benefits like maternity pay may be affected too because of your lower NIC – so it might not be a good idea for budding parents.
How else can I boost my pension?
If salary sacrifice isn’t for you, there are other ways in which you can boost your pension.
You could be missing out on thousands of pounds if you have a missing pension pot.
Around 1.6million savers have lost track of where their pension pots are.
If you move jobs regularly, you may have many pension schemes you’ve forgotten about, because companies have to auto-enrol you onto a scheme.
Your employer should be able to tell you where your pension money is if you have been auto-enrolled onto a scheme.
There may be a website you can login to where you can view who manages your pension, how it is invested and alter your contributions.
Pensions providers are also supposed to send annual statements to scheme members so check old paperwork or emails.
Check online if a provider has merged or been sold to another company as that could mean someone else is in charge of your pension.
You also might have been overcharged for dipping into your pension pot before you’ve retired.
Usually you can take the first 25% of your pension tax-free, and anything over that is taxed.
But when taking a lump sum you can be taxed at an emergency rate and end up paying more than you have to.
We revealed that HMRC has had to pay Brits £33million back this year because it taxed them too much for accessing their retirement cash.
Nearly 10,000 people overpaid in the first three months of the new tax year from April to June.
They got back £3,379 each on average from HMRC.
The government urge people to check if they’re eligible for pension credit
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