The introduction of a further 0.5 per cent rise in National Insurance contributions will lead to an effective tax relief rate of 66.3 per cent for pension investors who choose to use salary sacrifice.
In his pre-Budget report on Wednesday, Chancellor Alistair Darling announced that from 2011-12 the main rate of national insurance contributions will increase by a further 0.5 per cent, in addition to the 0.5 per cent previously announced.
Standard Life head of pensions policy John Lawson says this will make salary sacrifice for employees earning between £100,000 and £113,000 even more attractive because with the extra 1 per cent of NI, they will get an effective tax rate relief of 66.3 per cent, as opposed to the current rate of 47.7 per cent.
For those earning between £113,000 and £130,000, salary sacrifice will still be attractive. Employees earning £130,000 and sacrificing £30,000 in salary will receive 56.24 per cent in tax relief. Currently they are also receiving 47.7 per cent.
Lawson says: “From April 2011, employees earning between £100,000 and £113,000 will receive 60 per cent tax relief on personal pension contributions but using salary sacrifice will push this up to 66.3 per cent.
“Salary sacrifice is a nobrainer for these people because pension contributions of £100 will only cost you £34 net. These are further complications which offer a good opportunity for IFAs to revisit their clients.”