Standard Life marketing technical manager Andy Tully says the lowering of basic-rate tax, which will be introduced from April 2008, is good news for anyone earning £15,000 or more a year.
But Tully says the changes to National Insurance means that people earning above £35,000 will pay more in NI which will negate the benefits of the lower basic rate.
He says investors in this salary band should consider using salary sacrifice to pay their pension contributions because they will save significant sums on NI contributions.
Salary sacrifice is an arrangement between an employer and employee where the employee agrees to a reduction in salary or bonus in exchange for a non-cash benefit provided by the employer.
Taken as a payment into the employee’s pension scheme, it could earn an extra £300 to £600 a year in pension contributions.
Tully says: “By reducing the salary or bonus, employee and employer save on NI. The employee will benefit as a higher level of pension payment can be made without reducing take-home pay and the employer will benefit as they will pay reduced NI.”