I dealt with a fascinating situation recently where a client who had been referred to me told me that he had been providing services to a company for many years and was now being offered an employed role. The salary would be £125,000 per annum.
This particular gentleman was in his early 50s and had built up a relatively small pension pot during his working life.
He could comfortably afford to sacrifice £25,000 per annum of his salary and arrange for his employer to pay this sacrificed sum into his pension plan. This is usually carried out on a monthly basis, so the employer is in no way worse off through this valuable salary sacrifice benefit to the employee. The employer, by not paying £25,000 per annum in salary would be saving 13.8% in employer National Insurance contributions amounting to £3,450. There will be no loss to the employer for paying this to the employee compared to paying the original salary if this sum were added to this gentleman’s pension plan.
Therefore, with the higher rate tax saving of 40% being £10,000 and the benefit of the employer’s national insurance contribution addition of £3,450 per annum for a net cost of £15,000 per annum an amount of £28,450 per annum was being invested into this gentleman’s pension plan. This has almost doubled his investment even before the funds were even invested.
Incredibly, it gets better, because we lose part of or the whole of our personal allowance (£12,570) where our income exceeds £100,000 per annum. Salary Sacrifice brings even further benefits. For every £2 of salary earned above £100,000 per annum, our personal allowance is reduced by £1. This means that if we earn above £125,140 per annum our personal allowance of £12,570 is lost completely, leading to an additional Higher Rate Tax burden at 40% or even worse for an Additional Rate Taxpayer being subject to 45% on £12,570.
In this case, for sacrificing £25,000 of his £125,000 salary, he would have a further saving or £5,000 per annum by reducing his salary to £100,000 regaining practically all of his personal allowance.
This means that now for a net cost of £15,000 per annum an amount of £33,450 will be invested into is new pension plan. This is quite staggering and such an enormous benefit to the individual. Clearly it could help so many others in a similar situation.
Update 30.07.2022
Now that we are down to just two left in the competition to be Prime Minister; Rishi Sunak or Liz Truss, Income Tax rates and National Insurance rates are subject to potential change depending on who will become PM.
Both Employer and Employee National Insurance rates were increased by 1.25% from April 2022 along with an increase of also 1.25% on Dividend Tax.
If the National Insurance rates stand, it makes Salary Sacrifice in the example given above, even more attractive.
This employee was being offered a salary of £125,000 per annum and chose to sacrifice £25,000 of the salary. In doing so he regained practically all of his personal allowance bar £70 and would benefit from, subject to the employer’s agreement, Employer and Employee National Insurance savings.
Even before, we were turning a net pension contribution of £15,000 into a contribution of £33,450. If we now take into account the increased Employer National Insurance savings of 1.25% and all of the Employee National Insurance savings, the gross pension contribution could be £34,575. Remarkable. Let’s wait and see if these National Insurance and Dividend Tax increases remain.
Trevor Downing FPMI FPFS
