Saving for retirement usually shrinks your take-home pay by less than the amount you put in. That surprises people, and it is the main reason to understand how the schemes work in your country.
Before-tax contributions
With a before-tax scheme, the contribution is taken from your pay before income tax is calculated. You pay tax on a smaller amount, so a 100 contribution may reduce your take-home pay by only 75 to 80, depending on your tax rate. In the US, traditional 401(k) contributions work this way. In the UK, a workplace pension taken through net pay arrangements, or through salary sacrifice, also reduces the pay that tax is worked out on.
After-tax contributions
With an after-tax scheme, you pay the contribution from pay that has already been taxed. Your take-home pay falls by the full amount, but there may be tax advantages later: a Roth 401(k) in the US, for example, aims to make qualifying withdrawals tax-free in retirement. Which one is better depends on whether you expect to pay a higher or lower rate in retirement than now.
UK: three ways of paying in
UK schemes differ in how the tax effect works. With net pay, the contribution comes off before tax. With relief at source, you pay from taxed pay and the pension provider claims basic-rate tax back for you. With salary sacrifice, you agree to a lower salary and your employer pays the difference into the pension, which can also reduce National Insurance. Our UK calculator lets you choose between net pay and salary sacrifice so you can see the difference.
Australia and New Zealand
In Australia, your employer pays superannuation on top of your salary. Our calculator shows the amount separately, and you can choose whether a quoted salary includes super. In New Zealand, KiwiSaver contributions are taken from your pay at a rate you choose from a set of options, and your employer also contributes. Check the current minimum rates with the government's Inland Revenue site, as they can change.
Employer matching: free money
Many employers match part of what you contribute, or add their own amount. If your employer matches contributions up to a limit, not taking the full match is turning down part of your pay. Before adding extra savings elsewhere, check how much your employer will match and whether you are taking all of it.
How to see the effect
Use the pension, 401(k) or KiwiSaver field in our calculator. Try 0 and then your chosen percentage and compare the net pay figures. The difference in take-home pay is what you are really giving up, and it is usually smaller than the amount going into your retirement pot. Rules and limits change each year, so confirm current limits with the official tax authority or your plan provider.
Calculators for this guide
More tips
- How to Read a Payslip, Line by Line
- Hourly, Weekly, Monthly or Yearly: Converting Pay Without Mistakes
- Marginal and Effective Tax Rates: Why a Pay Rise Never Costs You Money
- How to Compare Two Job Offers Properly
- Why Your Real Payslip May Differ From an Online Estimate
- Bonuses and Overtime: Why They Seem to Be Taxed More
- How to Build a Budget From Your Take-Home Pay
- States With No Income Tax: What That Does and Does Not Mean
- Moving for a Job: Will You Really Be Better Off?
- Self-Employed? How Much Should You Set Aside for Tax
- Asking for a Raise: Using Take-Home Numbers to Plan the Conversation
- Student Loan Repayments and Your Take-Home Pay
- A Yearly Tax Check-Up in Thirty Minutes
- All tips and guides
These guides are general information and estimates to help you plan. They are not tax advice. Rules and rates change, so check the official tax authority for your country.