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Salary Sacrifice

Salary Sacrifice is a huge opportunity for tax efficient financial planning, in general, not just for pension contributions.

Here is an example of how working with a financial adviser from Cambridge Pensions can add significant value, and this is all before you factor in How to select a pension, How to select pension funds, How to take pension income, and how to co-ordinate your pension with all your other considerations and assets with Professional Financial Advice.

Let's think about how money is paid from both Net Pay (as from most occupational pension schemes) and Relief at Source.

Any employer contributions are paid without any tax being deducted, however, any personal contributions are subject to (20%) Income Tax and National Insurance (12% or 2%) before the tax relief is reclaimed by the pension company (or through self-assessment tax returns regarding higher and additional rate tax).

How does this affect a £100 personal contribution into a pension?;

  • 20% Income Tax is taken, 12% National Insurance Contribution, leaving £68, then the pension company reclaims 20%, so in reality, you get £85 going into your pension (not £100).
  • If you made an agreement (called a salary exchange letter) with your employer to make this contribution for you (and reduce your salary by this amount) you would get £100 of the £100 (as employer’s contributions are tax free)
  • In effect this means that to make a personal contribution into your pension of £100, you would need to use £118 of salary.

Asking your employer to pay it in saves this £18. That is a significant saving, (imagine if we told you a pension fund could return a guaranteed 18% every year!)

it gets better……

If the company makes a pension contribution then they don’t pay 13.8% National Insurance Tax on this amount, so, you should ask them to add that to the contribution. Instead of getting £100 contributed, you will get £113.80 contributed.

This doesn’t cost the company any more money to give it to you instead of the tax man, and many employers would like the idea of making employees better off without costing them anything to do it.

So to recap...

  • if you use £100 of your salary to contribute to your pension, you get £85 going into your pension.
  • If you set up a salary sacrifice arrangement then you get £113.80, for exactly the same £100 of salary.

That is a +25% increase in pension contribution.

To arrange salary sacrifice with your company, or employee, contact Cambridge Pensions).

it keeps getting better!…

Imagine you had a salary of £150,000.

  • If you earn more than £100,000 you lose your £12,500 Personal Allowance (the first £12,500 of your income is tax free if you earn less than £100,000). It is lost at £1 for every £2 over £100,000, so, in effect, from £100,000-£125,000 you are being taxed at the equivalent of 60%..
  • If you had an agreement with your employer to make a large pension contribution (up to £40,000 per year, however, you can use unused Carry Forward for the last 3 years, so this could be up to £160,000 subject to pensionable earnings) you could take £100,000 salary and they could make a pension contribution of £56,900 (£50,000 with 13.8% added). This would not cost the employer any more money to facilitate. (If you don’t have Carry Forward available then change the input amount to max £40,000).

How good is your retirement starting to look with those level of pension contributions being made? Is early retirement starting to look like an option? Or, a down payment for your child’s first house deposit made out of tax free cash from age 55 (if you are in the correct type of pension with flexible drawdown options).

Salary Sacrifice works well for people with lower incomes too.

For salary sacrifice advice contact Cambridge Pensions.