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Benefits of sacrifice?
The latest round of state pension reforms, as set out in November's Pre-Budget Report, starts from 6 April 2009. If you are an employee:
• The ceiling for full rate national insurance contributions (NICs) will rise by £74 a week (see page 4); but
• The upper level of earnings for state second pension (S2P) benefits, or the corresponding contracting out rebates, will be frozen.
If you earn more than the new upper full rate NICs limit (£43,875 a year) and are under state pension age, you will pay 11 % NICs on about £3,850 of earnings for which you accrue no state pension-related benefit. Matters become worse if you have fringe benefits, such as a company car, which restrict your PAYE tax code. You could find that part or all of that £3,850 band of earnings is also subject to 40% income tax.
The combined effect of 40% income tax and 11 % NICs means that, at the margin, you could be left with 49p for each £1 of pay. This can be turned to your advantage if you use salary sacrifice to boost your pension contribution, as the example below shows.
Even though salary sacrifice can be highly tax-efficient, it is not suited to everyone. Sacrificing salary reduces your earnings and may limit your ability to borrow. So do ask for advice before you make any changes. The Financial Services Authority does not regulate tax advice. The levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances.
The latest round of state pension reforms, as set out in November's Pre-Budget Report, starts from 6 April 2009. If you are an employee:
• The ceiling for full rate national insurance contributions (NICs) will rise by £74 a week (see page 4); but
• The upper level of earnings for state second pension (S2P) benefits, or the corresponding contracting out rebates, will be frozen.
If you earn more than the new upper full rate NICs limit (£43,875 a year) and are under state pension age, you will pay 11 % NICs on about £3,850 of earnings for which you accrue no state pension-related benefit. Matters become worse if you have fringe benefits, such as a company car, which restrict your PAYE tax code. You could find that part or all of that £3,850 band of earnings is also subject to 40% income tax.
The combined effect of 40% income tax and 11 % NICs means that, at the margin, you could be left with 49p for each £1 of pay. This can be turned to your advantage if you use salary sacrifice to boost your pension contribution, as the example below shows.
Even though salary sacrifice can be highly tax-efficient, it is not suited to everyone. Sacrificing salary reduces your earnings and may limit your ability to borrow. So do ask for advice before you make any changes. The Financial Services Authority does not regulate tax advice. The levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances.