Workers earning an average salary of £34,963 per annum could retire a year earlier by opting into a workplace salary sacrifice scheme, according to analysis by Scottish Widows.

Salary sacrifice allows employees to exchange part of their salary for an employer pension contribution, benefitting both employers and employees as neither pays National Insurance contributions on the exchanged amount.

Scottish Widows calculated those workers on an average salary, taking home £27,294 after tax, could increase their take-home pay by £140 a year by opting into their employer’s pension scheme and taking advantage of the tax benefits.

Additionally, saving the extra cash into a pension, alongside employer-reduced National Insurance contributions, could see pension savers have an extra £463 each year.

Over 25 years, assuming 5.4 per cent growth, this could add £35,900 or a year’s salary to the saver's pension pot.

Despite this, research by Scottish Widows found that a fifth (22 per cent) of workers said they have never heard of salary sacrifice or salary exchange, while 31 per cent said although they had heard of the term, they knew very little about it.

The research also found that misconceptions around salary sacrifice remained high, with 34 per cent believing it would result in less take-home pay and 12 per cent were under the impression it is only available to higher earners.

However, over half (57 per cent) said they would opt for salary sacrifice if it guaranteed their take-home pay would not be reduced.

Meanwhile, 40 per cent believed that making it simpler and easier to understand and access should be a top priority for employers and the pension industry.

Scottish Widows emphasised that salary sacrifice has tax benefits, especially for those in the higher tax bracket paying 40 per cent on earnings over £50,270, as these UK workers would move down a tax bracket, reducing their tax liability and increasing net pay by opting into a salary sacrifice.

Commenting on the analysis, Scottish Widows retirement expert, Susan Hope, said the term salary sacrifice is “really misleading” because neither employee nor employer needs to sacrifice anything, arguing that salary exchange is a “more accurate description”.

“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,” Hope added.

“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.”

She noted that getting more people to save more for the future is “incredibly important”, adding that increasing the awareness of salary exchange, while tackling some of the misconceptions, is one way to do this.

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