Salary sacrifice pensions ‘become even more attractive’ – but beware | Personal Finance | Finance

0

Following last week’s news of a hike in National Insurance in order to pay for the Prime Minister’s newly announced health and social care plans, it is more important than ever for UK taxpayers to find ways to get the most out of their earnings. It has recently been suggested that salary sacrifice pensions could be an attractive method to continue topping up one’s pension in the face of constant change.

Coming into effect next tax year, the increase in National Insurance is set to cost employees an extra 1.25 percent of their qualifying earnings each year. Next tax year, employers must pay 15.05 percent National Insurance contributions compared to 13.8 percent this year, while employees must pay a 13.25 percent main rate rather than 12 percent.

As a result of these changes to National Insurance, employers and employees are being reminded of the benefits of salary sacrifice pensions. Salary sacrifice enables employees to give up part of their future salary, in exchange for an employer pension contribution, meaning one would earn slightly less but will in turn give their pension a boost.

READ MORE: Pensions: Boris Johnson and Rishi Sunak told to abolish lifetime allowance

The employee would then pay 20 percent tax and 13.25 percent National Insurance on the £1,000 they receive. That works out at £332.50 of deductions, reducing their net pay to £667.50 each month. However, via salary sacrifice, if an employee earning £30,000 sacrificed £1,000 of their salary in return for a £1,000 employer pension contribution, the employer would save the £177 in National Insurance.

At the same time, the employee would benefit from an extra deposit into their pension, essentially boosting their pension savings by £1,000 at a cost to them of just £667.50 in salary, meaning they would have benefitted to the tune of £332.50, which would go towards their retirement savings.

Sean McCann, Chartered Financial Planner at NFU Mutual, said: “The hike in National Insurance makes salary sacrifice pensions even more attractive for both employees and employers. Employees do not pay income tax or NICs on employer pension contributions and those employers using salary sacrifice will also be making bigger savings from April next year.”

However, Mr McCann did warn that there are cons as well as pros to using a salary sacrifice, as such a tool will not be right for everyone. He said: “There are some potential drawbacks for employees. Taking a lower salary can impact the amount a mortgage lender may be prepared to lend, and the amount of maternity pay and other benefits they receive. It’s important that employers and employees take advice so they’re aware of the potential savings available to them”.

The terms of the National Insurance hike will mean that those who are still working past retirement age, who had previously not had to pay National Insurance, will also have to contribute to the payment of Mr Johnson’s Health & Social Care levy.

This is another blow to pensioners following the news of the state pension triple lock being scrapped for next year. In the wake of these newly announced changes, it is important that older workers heading towards retirement assess what is the best option for them as they look to prepare for their post-working life.

In line with the National Insurance changes, dividend tax has also been increased to offset the fact that many workers past state pension age are running their own small business. As part of the Health and Social Care reforms which the National Insurance hike is contributing to, from October 2023, the Government will introduce a new £86,000 cap on the amount anyone in England will need to spend on their personal care over their lifetime.

Anyone in England with assets of less than £20,000 will not have to make any contribution for their care from their savings or the value of their home, while those with assets of between £20,000 and £100,000 will be eligible for some means-tested support in England. Currently, anyone with assets over £23,250 in England must pay their care costs in full.

FOLLOW us ON GOOGLE NEWS

 

Read original article here

Denial of responsibility! My droll is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – [email protected]. The content will be deleted within 24 hours.

Comments
Loading...