Salary trick could add £140 to your wages and see you retire early

People could retire a year early by taking advantage of a benefit offered to anyone with a workplace pension, according to new analysis. The figures show that workers on an average salary of £34,9631 a year could retire 12 months earlier than planned simply by opting into a workplace salary sacrifice scheme, also known as salary exchange.

Scottish Widows has calculated that average salary workers – who take home £27,294 annually after tax – could increase their take home pay by £140 a year, simply by opting into their employer’s pension scheme and taking advantage of the tax benefits. Workers redirecting the extra cash into their pension savings, alongside the savings that the employer makes through reduced national insurance contributions, could result in an extra £463 paid into their pension each year.

Which, over the course of 25 years and assuming 5.4% growth, could add £35,900 to their pension pot. This is equal to a whole year’s salary. Salary exchange is an arrangement where employees exchange part of their salary in return for an employer pension contribution.

Because the salary is being exchanged rather than paid directly, it benefits both employers and employees as neither pays National Insurance contributions on the amount exchanged. This means there will never be a reduction in an employee’s take home pay.

It also comes with certain tax benefits especially for the 700,000 UK workers now in the higher tax bracket paying 40% on earnings over £50,2703. Opting into salary exchange would see these UK workers move down a tax bracket, reducing their tax liability and increasing net pay.

Scottish Widows research reveals a fifth of workers have never heard of salary sacrifice or salary exchange, and while some have heard the name, they know very little about it. Misconceptions around salary sacrifice remain high with 34% believing it will result in them taking home less pay and 12% under the impression it is only available to higher earners.

Susan Hope, Scottish Widows Retirement Expert, said: “The term ‘salary sacrifice’ is really misleading because neither employee nor employer needs to sacrifice anything. ‘Salary exchange’ is a much more accurate description because workers are essentially missing out on free money that they could be seeing in their take home pay or adding into their pension savings by not taking advantage of this scheme. While it might sound complicated, it’s just a slightly different way to make pension contributions and importantly, it will never mean workers take home less pay. A common myth that needs to be dispelled.

“Getting more people to save more for the future is incredibly important and increasing the awareness of salary exchange, while tackling some of the misconceptions, is one way to do this. Speak to your employer and see if it is something they offer and if so, ask them to run you through what it would mean for both your money now, but also your future savings.”

You can find out if your employer offers a workplace salary exchange scheme here.