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PBR: Income tax and NI rises will boost salary sacrificing

Industry experts are predicting the increase in income tax on people earning over £100,000 and the 0.5 per cent jump in National Insurance rates in 2011 will boost the number of people sacrificing their salaries through pensions.

During his pre-Budget report speech today, Chancellor Alistair Darling told the commons that he would slash the income tax personal allowance for people earning over £100,000 by half and, for those making more than £140,000, he would cut it completely.

He said: “I want to remove the long running anomaly of the income tax system by which personal allowance is worth twice as much to higher rate tax payers as it is to basic rate taxpayers.”

Darling also announced that, from April 2011, all rates of National Insurance contributions would increase by 0.5 per cent for people earning over £20,000 per year.

Pension specialists are predicting the number of people sacrificing their salaries to fund a pension to soar as someone earning over £100,000 could save up to £1200 a year. Meanwhile those earning closer to £43,888 could save nearly £400 a year by sacrificing their salary to below £40,000.

Standard Life head of pensions policy John Lawson says: “Putting in place a salary or bonus sacrifice arrangement to fund a pension is likely to prove a popular option for those earning above £100,000. Not only could they save over £100 per month by keeping the full personal allowance, they may also pay no income tax or national insurance on the amount sacrificed, saving another 41 per cent. In total, someone earning £100,001 and sacrificing £5,000 in salary or bonuses could save tax of £3,257 – an effective rate of tax relief on a £5,000 pension contribution of 65 per cent. The same person sacrificing £1,000 could make tax savings of £1,607 – an effective tax relief rate of over 160 per cent.”

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