Health and social care sectors have been notoriously underfunded for some time and in the wake of the pandemic the decision by the Chancellor to announce 1.25% increase to National Insurance, has yielded many questions. Today we are going to look at one scenario to find out what can be done, how and why?
Let’s start with pensions, some of us are saving into them, some of us are already benefiting from them but none of us can afford to be complacent!
One neat option, salary sacrifice, may be just the tool for you. As the name suggests the idea is to "give up" part of your salary in exchange for pension contributions. In effect this alters the way that your Income Tax and National Insurance rates are calculated.
Under the salary sacrifice arrangement, your salary is directly reduced by the chosen amount and that is paid straight into your pension scheme. Only once this has occurred, then the National Insurance Contributions are calculated and paid on the new salary amount, resulting in lower bills for both you as well as your employer.
Another way to view salary sacrifice is to realise that using the same starting figures, it is possible to achieve two different aims.
Edith is a basic rate taxpayer with a salary of £32,000 per annum. She has decided to opt for salary sacrifice and her goal is to take home the same monthly pay as pre-salary sacrifice. With the help of her financial adviser, she will be able to achieve this as well as use the resulting National Insurance savings to benefit from increased pension contributions.
Rufus, her colleague, receives the same salary and he too has opted for salary sacrifice. But in his case, when he ‘gives up’ his chosen amount without any income tax or national insurance being due on this sum, his wish is to maintain the same pension contributions as before but increase his take home pay.
Whilst it can be a great way of securing a bigger pension pot or maintaining it at a certain level, there are downsides as well – discuss these with your Independent Financial Adviser who will be able to provide you with suitable advice. In a nutshell, if choosing salary sacrifice be mindful of the fact that other benefits linked to your salary such as life insurance, gym membership or childcare vouchers will be effected. Mortgage is another one, due to the altered salary amount, the size of possible borrowing will reflect this change.
Salary sacrifice is one of the options to consider in the light of the proposed National Insurance rises from next tax year but as always, your financial adviser will be able to assess your personal circumstances and work with you to achieve your aims, in retirement and now.
Silvia Johnson BSc(Hons) DipPFS EFA CertCII (MP) is a Director & Independent Financial Adviser at Royale Thames Wealth Ltd.
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