Could salary sacrifice be the solution to fund your pension?
More and more people are using salary sacrifice to fund their pension, and if you aren’t you could be losing out!
If you are worried that you are too late to start saving for your retirement, this might be the solution.
Salary sacrifice is an important pension planning tool that permits employees and business owners to maximise the tax relief on pension contributions, with tax relief in excess of 60% possible.
Salary sacrifice means agreeing to a reduction in your salary in exchange for an alternative financial benefit. However, HMRC plan to change the rules for some financial benefits known as ‘benefits in kind’ – these include company cars, private medical insurance or even funding a mobile ‘phone contract.
The good news is that HMRC has confirmed that salary sacrifice for pension contributions is here to stay “because the government wishes to encourage employers to provide these [benefits] to employees.”
Example: The Benefits of Salary Sacrifice
Consider an employee earning £25,000 for the tax year 2016/17, who wants to contribute £100 a month (gross) to his/her personal pension.
The table below shows three different ways of funding the personal pension contribution and how the employee can benefit by using salary sacrifice.
• Column A: the employee makes the contributions personally from salary.
• Column B: the employee’s salary is sacrificed by the amount of the gross contribution, and employer pays into the pension – this gives the same pension contribution, with more take home pay.
• Column C: the employee’s salary is sacrificed to the amount which leaves the same take home pay, and the employer pays the sacrificed salary into the pension. This gives a larger pension contribution with the same take home pay.
Table: How the employee can benefit:
| A | B | C | |
| Salary | £25,000 | £23,800 | £23,588 |
| Personal allowance | £11,000 | £11,000 | £11,000 |
| Taxable income | £14,000 | £12,800 | £12,588 |
| Tax payable | £2,800 | £2,560 | £2,518 |
| National Insurance | £2,033 | £1,889 | £1,863 |
| Net salary | £20,167 | £19,351 | £19,207 |
| Pension contributions (net) | £960 | Nil | Nil |
| Spendable income | £19,207 | £19,351 | £19,207 |
Summary:
| A | B | C | |
| Pension contribution (gross) | £1,200 | £1,200 | £1,412 |
| Increase in take home pay | Nil | £144 | Nil |
| Increase in pension contribution (gross) | Nil | Nil | £212 |
To read more about salary sacrifice and see more examples click here:
Don’t delay and don’t lose out. Call the pensions experts at Innes Reid on 01244 347583 to start using pension salary sacrifice today.
Chartered Financial Planner (APFS)
Mark has been working in the Financial Services sector since 1990. After qualifying as a Financial Adviser, he worked for a large North West based IFA for almost 7 years before founding Innes Reid Investments Limited in 1999.
Since its foundation, Innes Reid Investments has grown to become one of the leading IFAs in the North West and one of the Top 250 IFAs in the UK as listed in The Times. Mark specialises in a wide range of financial services including, but not limited to: Pensions, Inheritance Tax Planning, Wealth Management and Tax Year End Planning. View full profile >
