Faced with rising cost of living and rising employer spending across the UK, decades of strategies are looking for new life as a tool to increase retirement savings while retaining (or even enhancing) paid paychecks.
Scottish widow workplace savings expert Susan Hope told Yahoo Finance UK that wage sacrifice, also known as salary exchange, is a “pension fairy tale” that highlights how it brings savings to employees and employers.
Hopefully, no time wasted to eliminate common misunderstandings. “We need to stop calling it a salary sacrifice because sacrifice means loss,” she said.
Instead, she prefers salary exchange. “It is precisely that the exchange and employees agree to waive a portion of the total salary, pre-tax salary and national insurance in exchange for donations from employer pensions.”
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By reorganizing donations, salary exchange allows money to bypass salary deductions, thus avoiding tax and state insurance contributions. In this way, employees can not only increase their pension cans, but also enjoy savings that can be expressed as increasing their net salary.
For employees, sacrificing their salary is to work by reducing the employee’s total salary and reducing their taxable income. This reduction could lead to an increase in take-home salary as employees benefit from lower taxes and state insurance contributions. Additionally, the benefits saved by these reduced deductions can be redirected to the employee’s pension, thereby increasing pension contributions at a higher and more effective rate.
Hopefully, for an employee with an average UK salary of £35,000, an additional £140 a year is paid, which seems not small in the short term, but if 25 years are accumulated to 25 years, £20,000 is accumulated and reinvested.
In addition to increasing long-term retirement savings, this approach offers direct benefits. For example, reducing one's own total salary by sacrificing salary or salary exchange can reduce the repayment of student loans and avoid pitfalls such as taxes on high-income children's welfare or personal allowances starting when income exceeds £100,000.
Additionally, by getting the right tax relief rates directly in their wages, senior taxpayers no longer need to go through the administrative hassle of recovering additional relief in January each year, which can save time and stress.
Employers facing increased national insurance contributions will rise to 13.8% to 15% from April 2025, while the accompanying growth of national living wages continues to increase under the pressure of management costs. Here, salary exchanges propose an attractive option.
