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Salary sacrifice to soar

The number of people using salary sacrifice to fund a pension is expected to leap after Chancellor Alistair Darling set out changes to income tax personal allowances and a National Insurance rate hike.

In his pre-Budget report on Monday, Darling told the House of Commons that, from 2010, the personal allowance will start to be withdrawn at a rate of £1 for each £2 of income over £100,000 until it is halved at £106,475. For those earning over £140,000 a year, the personal allowance will continue to disappear at this rate until it is axed completely at £146,475.

Darling 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 taxpayers as it is to basic-rate taxpayers.”

From April 2011, National Insurance contributions will rise by 0.5 per cent for anyone earning over £20,000 a year.

The tax increases mean that people earning between £100,000-£106,475 and £140,000-£146,475 could benefit from 60 per cent tax relief if they choose to use salary sacrifice to fund a pension.

People earning more than the higher-rate tax threshold of £43,888 could also use salary sacrifice to fund their pension. In this case, they would avoid paying 11 per cent National Insurance as well as income tax on that income, securing tax relief at a rate of around 31 per cent.

Hargreaves Lansdown pensions analyst Nigel Callaghan says: “People earning between these amounts could get up to 60 per cent tax relief if they sacrificed their salary. This way, you will receive your full personal allowance, get tax relief inside the pension and save on National Insurance as well.”

Standard Life head of pensions policy John Lawson says: “Someone earning £106,475 could save nearly £4,000 a year. They would keep their personal allowance of £6,475, save £2,590 as tax relief on the pension contribution and £65 through National Insurance relief. This is a great opportunity for advisers to help out their clients.”

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