Unfiltered, Uncensored Guide for High Earning Taxpayers on Salary Sacrifice Pensions
Considering your increased income of £125,000, you're pondering the idea of maximizing contributions to your pension through salary sacrifice.
Wanna know if you should dump as much cash as possible into your pension via salary sacrifice? Here's the lowdown, straight from the gut.
The Juicy Details on Salary Sacrifice
Let's admit it - if you're making £105k+ a year and just got a £20k annual pay boost, you've got big bucks rolling in. But, once you hit the £100,000 mark, that extra dough gets whacked with a 60% tax rate. Gross. Right?
So, you're thinking jumping on the salary sacrifice bandwagon and chucking most of that extra cash into your pension might be a smart move. Your company's cool with it, but is it legit from a tax perspective? That's what we're here to answer.
The Big Picture on Salary Sacrifice
First things first: salary sacrifice is a system that saves you on national insurance and tax, as well as lowering your yearly income (because you earn above £100k and the taxes are a kill). With the salary increase almost entirely landing in the 60% tax bracket, you're worried the government's gonna change the game and leave you high and dry.
Now, theoretically, you could largely salary sacrifice your monthly earnings over the next four months into your pension, maxing it out and reducing your income this tax year. But, before you go hog wild, make sure it's all kosher from a tax standpoint.
Say What Now? On the Tax Side of Things
Don't fret. This week, Simon Lambert from This is Money has got your back. Here's what he has to say:
In a twist of fate, your question surfaced in the same week that NatWest left taxpayer ownership. While you might be scratching your head, wondering why that matters, let's break it down. The 60% tax trap is a financial crisis throwback.
Britain owned a chunk of RBS thanks to the craziness of the financial crisis. And when that happened, some strict tax measures, like the one that created the 60% tax trap, popped up to raise funds. Guess what? That old boy's still around, long after the crisis bit the dust.
In April 2009, Alistair Darling, (yeah, that guy) announced that the personal allowance would be phased out at a rate of £1 for every £2 earned above £100k. This created the highest effective income tax rate in the history of Old Blighty: 60%.
There are other factors that can jack up your tax bill, but they depend on specific circumstances, like your marital status or if you've got a kiddie on the way. The personal allowance removal, though, is baked into the system.
If the £100k threshold had risen with inflation, it would be at £180k right now, according to This is Money's handy inflation calculator.
The only way to get out of this mess is to lower your income. That's where salary sacrifice comes in, and people in your income bracket often dump as much as they can into a pension.
Last week, there were whispers that salary sacrifice was on the Treasury's radar, and they're trying to squeeze more cash out of it. An official report has been put together, but it's too early to tell if the rumors are true. Just remember, don't make financial decisions based on saving a quid here or there.
Now, let's dive deeper into how salary sacrificing as much cash as humanly possible into your pension plays out.
Expert Analysis: What's the Skinny on Salary Sacrifice?
Anita Wright, a financial planner at Bolton James, has some insight into the situation:
From a tax perspective, pumping significant pension contributions into your pension via salary sacrifice is likely to be highly beneficial, especially since you're sitting in a tax bracket where the personal allowance gets whittled down.
With your income jumping to £125k due to the promotion and increase, you're squarely in the bracket where the personal allowance gets phased out. Between £100k and £125k, your personal allowance gets reduced by £1 for every £2 above the £100k mark. This translates to a 60% marginal tax rate on income in that range.
Once your income surpasses £125k, you kiss your personal allowance goodbye altogether.
However, if you manage to reduce your gross income below £125k via salary sacrifice, you can recover a chunk of, if not all, your personal allowance, making your overall tax position more peachy.
Keep in mind that salary sacrifice will reduce your monthly net income (which would have been higher if you accepted the additional salary instead). Also, bear in mind that certain factors like the pension annual allowance, employment-related benefits, and borrowing capacity might impact your ability to go all-in on pension contributions.
There ya have it. Salary sacrifice can be a savvy move when aiming to minimize tax bills, but don't forget to weigh other factors too. Good luck, high roller. You've earned it.
[1] https://www.gov.uk/salary-sacrifice-schemes[2] https://www.independent.co.uk/news/business/news/salary-sacrifice-changes-tax-treasury-wealth-tax-outs-benefits-national-insurance-a8839121.html[3] https://www.cmpltd.co.uk/docs/articles/employment-tax/pension-contributions-and-salary-sacrifice-acas.pdf[4] https://hmtreasury.github.io/salary-sacrifice/[5] https://uebr.co.uk/articles/salary-sacrifice-remains-popular-despite-tax-changes-and-increasing-national-insurance-challenges/
- Investing a significant portion of his salary into a pension through salary sacrifice can help high earners reduce their national insurance and tax payments, providing relief from the high 60% tax rate.
- By salary sacrificing a portion of his monthly earnings, a high earner can potentially recover some or all of their personal allowance, which gets reduced when income exceeds £100,000, resulting in a lower overall tax bill.
- Before making any substantial adjustments to his personal finance, such as maxing out his pension through salary sacrifice, it is crucial for the high earner to consider other factors like pension annual allowance, employment-related benefits, and borrowing capacity that might impact his ability to save the maximum amount.
