Tax Planning Thoughts - April 2019
Salary sacrifice
This is an agreement between an employee and employer. The employee agrees to exchange part of their gross salary in return for a non-cash benefit, such as a pension contribution.
Reducing salary results in a saving in individual income tax and employee and employer national insurance contributions. As a result of the savings, when compared with the employee making personal pension contributions, salary sacrifice can produce the same pension contribution at a lower net cost, or a higher pension contribution at the same cost.
One-off bonuses can be sacrificed in a similar way to salary.
For example, David has a salary of £40,000 and is paying £2,400 gross per annum into his personal pension. His employer agrees to make an employer contribution for him if he gives up some of his salary –
|
|
Before |
Employer Saving Passed on |
|
|
EMPLOYEE |
|
0% |
100% |
|
Salary |
£40,000 |
£37,600 |
£37,891 |
|
Less income tax |
£5,500 |
£5,020 |
£5,078 |
|
Less National Insurance |
£3,764 |
£3,476 |
£3,511 |
|
Less contributions paid net* |
£1,920 |
£0 |
£0 |
|
Take home pay |
£28,816 |
£29,104 |
£29,302 |
|
|
|||
|
EMPLOYER |
|
0% |
100% |
|
Employer pension contribution |
£0 |
£2,400 |
£2,400 |
|
Plus Salary Paid |
£40,000 |
£37,600 |
£37,891 |
|
Plus employers national insurance |
£4,329 |
£3,998 |
£4,038 |
|
Cost to Employer |
£44,329 |
£43,998 |
£44,329 |
*the pension provider will add £480 basic rate tax relief and claim directly from HMRC
By swapping his personal provision for an employer contribution:
- David can maintain his gross contribution of £2,400 per annum and increase his take home pay by between £288 and £486;
- David’s Employer can have no extra cost or save up to £331