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Louise Thomas
Editor
Agreeing with your employer to “give up” a chunk of your salary may not sound like a fantastic financial deal – but workers can potentially make their money go further by using salary sacrifice schemes.
Yet just over a fifth (22%) have either never heard of them or are confused about how they could help, according to Scottish Widows.
Such schemes mean that workers voluntarily reduce their entitlement to cash pay, in return for a non-cash benefit.
Employers may offer salary sacrifice as part of their pension scheme, to help workers boost their pots. They may also be available in the workplace to help employees with cycle-to-work schemes, gym memberships or insurance costs.
Susan Hope, a retirement expert at Scottish Widows says salary sacrifice is “a great way to save for the future but is often misunderstood, with a fifth of workers confused about what salary exchange is and how it works.
“This could cause workers to miss out on essentially ‘free money’ – which they could benefit from in their take-home pay or in the future from increased pension savings.”
To help shed further light on how they work, Hope has shared a few tips to dispel some of the myths and misconceptions about salary sacrifice schemes:
1. It means a smaller pay packet
Hope says: “In fact, the main advantage of salary exchange is that it often results in higher take-home pay, as you’ll be paying lower national insurance contributions (NICs).
“You can always ask your employer to calculate how salary exchange would affect your take-home pay before joining.”
2. It’s only for higher earners
Hope says those who are eligible include earners who have a personal allowance of at least £12,570 (the amount of income you can have before paying tax) and earn above the NICs thresholds.
Hope adds: “There’s lots of free online tools, calculators and guides to help you confirm if you’re eligible or not before signing up.”
3. It’s not a way to boost retirement saving
Scottish Widows found three-quarters (76%) of people don’t realise salary exchange can be used to increase pension contributions.
“While it might sound complicated, it’s just a slightly different way to make pension contributions,” says Hope.
4. It will definitely affect future benefits
Hope says that if an employee chooses to opt into a workplace salary exchange scheme, then the employer can maintain a “reference salary”.
This ensures payments for benefits such as death in service, holiday pay and any overtime are honoured and calculated using the reference salary for accuracy.
It is worth checking this with the employer.
Something else to bear in mind is that a lower salary could affect borrowing applications, such as mortgages, although, again, check whether any reference salary agreed with the employer can be considered as part of the process.
