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Relief rate will be over 66% for salary sacrifice

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.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Please ask John Lawson to show his calculations arriving at 66.3%.

  2. For completeness I’ll look at all the figures quoted – *my* understanding is as follows:

    1)The 47.7% is based on current tax / NIC rates (40% higher rate tax, 1% higher rate employee NICs and 12.8% employer NICs).
    112.80 in the employer’s hands splits as 100 gross pay and 12.80 employer NICs. The 100 gross in the employees hands splits 40% tax and 1% NICs. So net of tax/NICs the employee would have been paid 59. By salary sacrificing *assuming* that the employer is good enough to pay the full 112.80 across the effective rate of tax relief is 1-59/112.80 =47.7%

    2) The 66.3% is based on higher rate tax of 40%, 2% higher rate employee NICs and *12.8%* (not 13.8% employer NICs).
    We also need to note that in getting paid 1 we lose not only the “ordinary” 40% tax but also the nil rate band on a “1 in 2” basis. That costs an additional 40%*1/2 = 20%. So effectively the marginal rate of tax between 100,000 and 100,000 + 2 *6475 = 112,950 (6475 = personal allowance) is 62%. The same approach as above gives the effective rate of tax relief as 1-38/112.80 =66.3%

    Note that this takes the employer NICs as 12.8%, which seems a little odd. 13.8% would give effective relief of 1-38/113.80 =66.6% – again on the assumption that the employer passes on the full 13.8%.

    3) The 56.24% can be derived as follows
    30000 gross income would give 14810 net income [ 14810= 30000*(1-42%) – 6475*40% allowing for total loss of personal allowance]
    Using salary sacrifice (and a generous employer!) the 30000 gets increased by 12.8% to give a contribution of 33840. Thus the effective rate of relief is 1-14810/33840 = 56.24%. If fully passed on, employer NICs of 13.8% would give an effective rate of relief of 56.62%

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