Salary sacrifice could boost wealth by £41,000 by retirement

As the basic rate of National Insurance falls from 12% to 10% this week, interactive investor calculations reveal how to save even more National Insurance through using salary sacrifice.

• A middle earner on £30,000 could save £150 National Insurance each year by using salary sacrifice, while a high earner on £50,000 could save £250 tax each year, or £500 if they increase their pension contributions to 10%.
• If this tax saving was invested, for a middle earner, this could add up to £25,000 additional investment wealth over the course of a 40-year working life.
• A high earner could achieve additional investment wealth of up to £41,000 through investing their NI savings, or £83,000 if they upped their pension contributions to 10% of their pay.
• If their employer also increased pension contributions to reflect their NI saving, a middle earner could gain an extra £59,000 over their working life, and a higher earner could increase their wealth by a total of £98,000 or £157,000 depending on their level of pension contributions.

Salary sacrifice is a government-backed scheme designed to help both employees and employers save on tax. An employee agrees to give up part of their salary in exchange for the extra money being paid straight into their pension. This means that the employee's official gross salary is reduced by the amount they sacrifice.

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The benefit for the employee is that they will save National Insurance as well as income tax on their pension payments, giving them more take-home pay. National Insurance will be 10% from 6 January for employees earning less than £50,270, meaning that they would save £10 tax for every £100 they pay into their pension under a salary sacrifice arrangement. Their employer will also save National Insurance at a current rate of 13.8%.

Some employers also agree to pay the extra tax saved into their employees’ pensions, potentially boosting an employee’s pension wealth significantly over time.

Assumptions and methodology

• Note 1 - includes employee National Insurance saved by making pension payments through salary sacrifice arrangement, assuming 5% or 10% pension contributions.
• Note 2 - assumes employer contributes amount saved in employers' National Insurance into employee’s pension.
• Note 3 – assumes employee invested tax saving in an ISA and achieved 5% annual investment growth, amounts invested increased by 2% each year.
• Note 4 assumes both additional ISA and employer pension contributions. Assumes employee invested tax saving in an ISA as per note 3 and also includes additional employer pension contributions under note 2, both achieving 5% annual investment growth after fees. Amounts invested increased by 2% each year.
• Investment amounts are rounded to the nearest £1,000

Alice Guy, Head of Pensions and Savings, interactive investor says: “With a rising tax burden, findings ways to save tax and keep more of your wealth are particularly valuable. Despite National Insurance falling to 10%, the reality is that frozen tax thresholds are making us all poorer as even lower and middle earners will pay more tax overall in 2024 as their wages rise with inflation.

“Using salary sacrifice to make pension contributions is a win-win for both employees and employers. It allows you to save on National Insurance as well as income tax, potentially saving up to 10% extra tax on pension contributions. And employers can save 13.8% employers’ National Insurance because the pension payment under a salary sacrifice arrangement isn’t officially counted as part of the employees’ pay.

“Someone earning £30,000 and contributing 5% to their pension would save £150 tax each year by using salary sacrifice, while someone earning £50,000 and contributing 5% would take home an extra £250 each year.

“Salary sacrifice is a great way to reduce your tax burden with no extra cost. Over a lifetime of working, using salary sacrifice can make a big difference to your long-term wealth, especially if you can afford to save or invest your tax saving. If you invest the National Insurance, you would have paid over 40 years, you could end up with a significant boost to your long-term wealth, taking you one step closer to a comfortable retirement.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Any cut in taxes is certainly welcome following what has been a difficult period for personal finances. But the harsh reality is that the savings are going to be completely nullified – and then some – for most people because of the deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be paying more in tax in the years to come.

“The burgeoning tax burden provides extra impetus to look carefully at various aspects of your finances and tax planning. However, it is important to note that a lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on one’s income, and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly.”