HR managers should be telling high earners in their organisations how to take advantage of salary sacrifice to boost pension contributions and cut tax and National Insurance (NI) contributions.
Changes to taxation on annual earnings of more than £100,000, due to come into effect next April, mean that using salary sacrifice to pay more into a pension fund could be almost self-funding. It would also cut employers’ NI bills.
Chancellor Alistair Darling announced the changes in last month’s Budget. Individuals whose gross income is more than £100,000 will lose £1 of their tax allowance for every £2 of income above £100,000, so those earning more than about £112,950 will get no personal allowance.
| Jon Robinson says that changes announced in the budget which affect pension tax relief for higher earners has put the spotlight on salary sacrifice schemes for those earning more than £100,000 and represents a “win win” situation. |
These changes mean that for a band of income between about £100,000 to about £112,600, the marginal rate of icome tax will be 60%. For example, someone earning £112,590 would pay tax of £38,240 while someone on £100,000 will pay £30,470 in tax.
But, should the higher earner sacrifice £12,950 of salary, to a pension fund, the tax savings would be about £7,770; they would be no worse off in their pocket, but their pension fund would enjoy a respectable boost.
Jon Robinson, tax specialist at Pinsent Mason, said: “The key for HR managers in all of this is that it is obviously an increase in the highest rate of tax for your high earners and a decrease in personal allowances, all of which will push up the overall tax bill for the highest earners.
“So, if salary sacrifice is not something you already have in place it is definitely something that employers should be considering more and more seriously.”
He added that salary sacrifice “saves employers’ NI contributions and these are scheduled to go up by 05% from 2011, from 12.8% to 13.3% of gross salary. So, salary sacrifice really is a win-win for both employer and the employee”.
Employers save because employees – after salary sacrifice – see their gross salaries fall which means employers’ NI contributions also drop.
The funds released could be used to finance other benefits or to enhance the employee’s pension fund, although, employers are not obliged to use them in this way, and could keep any savings generated.
| Jon Robinson, tax specialist at Pinsent Masons, explains the simplest and most common form of salary sacrifice in favour of employer pension contributions. |
Robinson also said that HR professionals need to make sure their employers “are on top of changes” to tax rates for those earning more than £150,000 per annum. One change will cut income tax relief on pension contributions made by these high earners.
It will mean their tax relief on pension payments will fall from 40% to 20%.
“Employers need to make sure they have got the systems in place to process pension contributions correctly during this transitional period and, going forward, from 2011 onwards,” said Robinson.
The transitional rules have yet to be fully formulated, he added, but said they will certainly bear down on those earning £150,000 plus who want raise their pension contributions significantly.
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