Here’s an idea for you.
And before I reveal it, let me assure you that I haven’t completely lost my marbles.
Here ‘goes *heavy intake of breath*.
Ask your employer if they would be okay with giving you a pay cut.
‘Why on earth would I do that?!’… I hear you ask 😵💫
It really is simple.
In doing so you could end up with absolutely no change to your net take home pay, but with the benefit of getting more paid into your pension every month.
It really is a win-win.
And no it’s not some shady, illegal workplace practise.
You’ve perhaps heard it more commonly referred to as salary sacrifice.
Many employers offer this lucrative benefit to their staff.
But few employees truly recognise the value in signing up to such a terrifying scheme.
And that’s perfectly understandable, given that the words salary and sacrifice should never go together.
The notion of voluntarily foregoing some of your salary every month seems pretty absurd.
But when you crunch the numbers it really does add up in your favour.
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.
Let’s quickly bin this HR definition and swap it for something more understandable and relatable.
Here’s my take:
You agree to ‘lose’ a set % of your salary every month. That money doesn’t go down the drain, but your employer instead holds it back and adds it to your workplace pension. Because you’re now earning ‘less’, you’ll pay less in tax and less in National Insurance. Your employer saves on their National Insurance bill too. And if they’re a friendly employer then they should add their savings into your pension as well. All of this makes for a well-fed and very happy pension pot.
Still with me?
If you’re clever with how much you sacrifice, then your take-home pay needn’t be any lower than if you were making the pension contributions yourself as ‘normal’ employee contributions.
You can choose how much salary to sacrifice.
Let’s take a step back.
What I’m saying here is that your monthly pay doesn’t need to go down, but the amount being paid into your pension can still go up.
That’s pretty magical.
For those of you that truly recognise the value of pension tax relief, you can be more aggressive with the amount you choose to sacrifice.
Take care however as you can’t sacrifice so much of your salary that you end up below the national minimum wage.
But you can rightly use-and-abuse this benefit to soak up as much tax savings as possible. Clearly in such a case your net take home pay will reduce, but compared with what’s going into your pension on the other side, you really get the bang for your buck. Think of it as pension-tax-relief-on-steroids.
Take care to not exceed any annual allowance restrictions you may have if you’re contributing large amounts (speak to a professional on this one), but on the face of it salary sacrifice is the yellow brick road towards a healthier, happier pension pot.
Of course it’s never one sided in personal finance and there are some disadvantages to be aware of before you do agree to salary sacrifice.
I covered this in episode 11 of my podcast, where I’ve also included a link to a calculator to help you run the numbers for yourself. Have a go and let me know how you get on.
So next time your employer offers you to join the workplace salary sacrifice scheme, don’t run a mile.
It’s not as counterintuitive as it might seem.
Whether you’re early in your wealth building journey, or have your eyes set on retirement (whatever shape that may take for you), salary sacrifice is a valuable benefit worth exploiting.
Speak to your employer today.
Ask if they run a salary sacrifice scheme.
If they’re a decent employer then they should do.
It’s probably best however you don’t lead with ‘would you mind paying me less?’ and instead opt for ‘do we run salary sacrifice here?’…
I can help you with your personal finances.
But not with the look your employer gives you when you willingly ask for a pay cut.