Salary sacrifice pensions ‘become even more attractive’ – but beware of ‘drawbacks’
Following last week’s news of a hike in National Insurance in order to pay for the Prime Minister’s newly announced health and social care plans, it is more important than ever for UK taxpayers to find ways to get the most out of their earnings. It has recently been suggested that salary sacrifice pensions could be an attractive method to continue topping up one’s pension in the face of constant change.
Coming into effect next tax year, the increase in National Insurance is set to cost employees an extra 1.25 percent of their qualifying earnings each year. Next tax year, employers must pay 15.05 percent National Insurance Contributions compared to 13.8 percent this year, while employees must pay a 13.25 percent main rate rather than 12 percent. As a result of these changes to National Insurance, employers and employees are being reminded of the benefits of salary sacrifice pensions.
Salary sacrifice enables employees to give up part of their future salary, in exchange for an employer pension contribution, meaning one would earn slightly less but will in turn give their pension a boost. The employer benefits, as employer National Insurance does not have to be paid on the amount deposited into their employee’s pension. The employee also benefits, as they do not have to pay income tax or National Insurance on the benefit.
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However, via salary sacrifice, if an employee earning £30,000 sacrificed £1,000 of their salary in return for a £1,000 employer pension contribution, the employer would save the £177 in National Insurance. At the same time, the employee would benefit from an extra deposit into their pension, essentially boosting their pension savings by £1,000 at a cost to them of just £667.50 in salary.
Sean McCann, Chartered Financial Planner at NFU Mutual, said: “The hike in National Insurance makes salary sacrifice pensions even more attractive for both employees and employers.
“Employees do not pay income tax or NICs on employer pension contributions and those employers using salary sacrifice will also be making bigger savings from April next year.”
However, Mr McCann did warn that there are cons as well as pros to using a salary sacrifice, as such a tool will not be right for everyone.
He said: “There are some potential drawbacks for employees. Taking a lower salary can impact the amount a mortgage lender may be prepared to lend, and the amount of maternity pay and other benefits they receive.
“It’s important that employers and employees take advice so they’re aware of the potential savings available to them.”
The National Insurance hike will mean that those who are still working past retirement age will also have to pay for Mr Johnson’s Health & Social Care Levy, another blow to pensioners following the news of the state pension triple lock being scrapped. In the wake of these newly announced changes, it is vital that older workers heading towards retirement assess what is the best option for them as they look to prepare for their post-working life.
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