3 ways pensions salary sacrifice can make employee pay go further

Despite its name, salary sacrifice is about saving money, not losing it

Despite costing nothing to implement, but bringing financial benefits to both employers and employees, 63% of workers are still not aware of salary sacrifice and only 34% actually use it.

This lack of awareness means that, collectively, UK pension savers could be losing out on up to £1.9bn worth of national insurance savings a year.

And on top of this, collectively, UK businesses could be losing out on around £2.1bn a year in NI contribution (NIC) savings.

3 ways that pensions salary sacrifice can help employees’ pay go further:

1. Extra pounds in pay packets

Despite its name, salary sacrifice is about saving money, not sacrificing it. Just changing the way employees pay their pension contributions reduces how much they pay in NICs.

Someone earning £30,000 a year could save around £180 a year and for someone on a salary of £50,000 the saving is around £300 a year.

The amount that ends up in the pension pot is the same, but there is extra money in pay packets each month.

2. Extra money to spend on their employees

It’s not only the employees who save money – employers save too. Using the examples above, on individuals earning £30,000 a year the employer would save on average around £200 a year, and for earnings of £50,000 a year, around £345 a year.

In the past few years, employers have typically retained these savings, but that trend is starting to reverse as employers look to help employees with the continuing cost of living crisis.

The money could be used to pay for financial education that can help employees learn how to budget better and provide tips on how to save on everyday spending.

Alternatively, the extra money could be used to launch an employee discount scheme that gives money off everyday items, making their disposable income go a lot further.

But for those forward-thinking employers who are looking to make their employees more financially resilient, the savings could be paid into workplace ISAs to give employees a kick start to building up a financial buffer.

3. Couple it with pension redirect

If you really want a solution that costs the employer nothing but adds massive value to employees, there’s a fairly new concept called pension redirect.

Pension redirect gives employees the option to have some of their pension contributions and the employer’s contributions paid into a workplace ISA.

Pension contributions are paid using salary sacrifice, which puts extra pounds into monthly pay packets, while contributions being paid into a workplace ISA really turbocharge employees’ financial aspirations and resilience.

With a product such as a Lifetime ISA, which offers a 25% government bonus, younger employees could see extra pounds in their pay pack each month while getting a helping hand with getting on the housing ladder. And still saving for retirement.

So why aren’t more employers offering salary sacrifice and more employees taking it up?

Cushon’s research suggests it’s about lack of awareness and misconceptions about what it really is and how it works. Even the name salary sacrifice is seen as negative, with 30% of employees thinking they will lose pay

Using the name to salary exchange better explains the concept – exchanging some salary for pension contributions which puts more money into the pay packet each month