Salary Sacrifice or Direct Pension Contribution?

Question

Duncan, my accountant has suggested ’salary sacrifice’ as a means of saving tax and bolstering my retirement funding.  What do you think?

Answer

It is arguable that where you are able to agree on a salary/bonus sacrifice with your employer, with the sacrificed income being paid as an employer pension contribution to your chosen scheme, this will prove the most tax efficient means of paying a pension contribution.

Contributions paid out of your net after tax pay are less attractive as you will have paid NI contributions on the income received. If instead agreement is sought with your employer to sacrifice salary/bonus equivalent to the desired pension contribution this will have the following advantages.

  • effectively there will no delay in receiving higher rate relief. By contrast if the contribution is paid directly by you to a personal pension scheme higher rate relief will need to be claimed via your self assessment tax return. Of course, if the contribution can be paid to an occupational scheme of which you are a member higher rate relief will be available immediately under the “net pay” system.
  • assuming the employer saving in NI contributions is applied as a contribution to your scheme the sacrifice will result, for a higher rate taxpayer, in an increase of almost 15% in their pension contribution.

The 2008 Pre Budget Report contained several announcements which will encourage the take up of salary sacrifice:

  • From 6 April 2009, the upper earnings limit for employees´ national insurance will be aligned with the threshold for higher rate income tax. This will result in a substantial hike in employee national insurance contributions with the threshold increasing from £770 p.w.in 2008/09 to £844 p.w. in 2009/10.
  • From 6 April 2011, both employer and employee´s national insurance contributions will increase by 0.5% across all bands.
  • From 6 April 2011, a new higher rate of income tax of 45% will be introduced on income of £150,000 and over.
  • From 6 April 2011, the personal allowance will be reduced by £1 for each £2 of income in excess of £100,000 to a reduced level down to 50% of the standard personal allowance. There will be a second reduction, of £1 for each £2 of income in excess of £140,000 until the personal allowance is extinguished.

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

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