Ask a planner answers: Salary sacrifice

Tuesday, June 7, 2016

The question, from Simon, 27, London 

I was wondering about salary sacrifice. I am currently just in the higher rate tax band, so paying 40% as my salary is roughly 43k. If i was to make a salary sacrifice of of 2k would this be a more efficient way of using my money as I would be contributing more to my pension and presumably my NI would go down. Would I end up with substantially less per month as a result of this? (I appreciate the value this would have to my pension though).

The answer, from Tony Larkins CFPTM, Beacon Wealth Management Ltd

A 40% tax payer benefits greatly from Salary Exchange as they would receive 40% tax relief on any pension contribution plus save 12% in National Insurance contributions on the amount sacrificed.

If you reduce your salary by £2,000, your revised salary would be £41,000 and would fall below the 40% tax band. All of your income over £10,000 p.a. would therefore be taxed at 20%.

£2,000 p.a. would be paid into yor pension plus 12% (£240) savings in National Insurance contribution.

Your employer should issue a letter to you confirming that your salary has been reduced by £2,000 p.a. and they will make a payment of £2,000 p.a. into your pension.

Your employer will also save money as they will pay less Employer’s National Insurance contribution. Some Employers pass on this saving to Employees, either the whole amount (which equates to 13.8% of the contribution) or in part – say 50%.

Tony Larkins CFPTM
Beacon Wealth Management Ltd