Salary sacrifice: reduce national insurance and increase pensions with “a more popular option | Personal Finances | Finance
Salary sacrifice allows people to trade in part of their salary for a non-monetary benefit from their employer, such as increased pension contributions, but people can also forgo their salary in exchange for perks such as bicycles, cell phones and bus passes. With National Insurance Hike 1.25% in April, Personal Finance Experts Believe Pay Sacrifice Will Become “A More Popular Option” As A Way To Help People Keep More Of Their Hard Money earned in their pockets.
The wage sacrifice options vary, as employers must choose to join a program. Brits are therefore urged to check with their employers to see what wage sacrifice programs are on offer, if any.
In The Money to the Masses podcast, Damien Fahy explained what wage sacrifice is and why people can opt for this type of plan.
He said: “The wage sacrifice can be incredibly useful, and I think it will become a more popular option following the increase in the announcement of National Insurance which will be an additional 1.25%, weighing on employees and employers. “
Under the following wage sacrifice schemes, the wages that a person foregoes will not be subject to tax or national insurance contributions:
• Childcare cycles provided by the employer
• Very low emission vehicles, including company cars
• Retraining courses and outplacement services
• Intangible assets, for example the purchase of additional annual leave
READ MORE Financially Free: The “Best Path” to Achieving Financial Freedom – “It’s Highly Doable”
By essentially giving up part of a person’s salary, the amount they receive is reduced, which decreases the amount of income tax and national insurance they pay.
National insurance contributions paid by a person’s employer will also be reduced.
This means that more of their money is spent on things that are good for them – like a pension – and less on taxes.
People can reduce their income tax and national insurance contributions by giving up part of their salary and earmarking it for retirement.
DO NOT MISS
Mr Fahy gave an example, he said: ‘Let’s say someone was making £ 40,000 a year and they were making five percent pension contributions to their company scheme and their employer matched that with five percent he would get £ 2,000 after tax break they contributed to their employer’s pension scheme and their employer also paid £ 2,000.
“Then when you factor in their income and the amount of tax they paid, including national insurance, their take-home pay would be £ 29,262 per year. When you include the pension contributions of £ 4000, the total benefit amount equals £ 33,262.
“Instead, they could decide to sacrifice their salary of £ 2,353 per year, by pouring that into their pension, and it is exactly the same as their take-home pay of £ 29,262 per year.
“However, they would end up with an extra £ 353 in their pension and that difference is actually the 12% national insurance savings they are making on the little salary they have sacrificed.
There can be downsides to the wage sacrifice that people are aware of.
Lower pay can affect rights such as maternity / paternity benefits, income-based mortgage applications, and some state allowances.
However, it can mean that people can claim more tax credits. people should check with their employer to make sure their bonuses, salary increases, and retirement benefits will not be affected.
Wage sacrifices are unlikely to work for people with low incomes, as the take-home wage is not allowed to fall below the national minimum wage.