Salary sacrifice pensions to increase following tax changes

28 November 2008 / by Rachel Mason
The number of workers who use salary sacrifice to fund their pensions is expected to shoot up following Alistair Darling's changes to income tax personal allowance and national insurance rates.

In his pre-Budget report, the Chancellor said that from 2010, the income tax personal allowance will start to be withdrawn at a rate of £1 for every £2 of income over £100,000 up until £106,475, where it will be halved.

For people who earn more than £140,000, the personal allowance will continue to be withdrawn and pulled completely at £146,475.

"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," Darling said.

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

However, the Chancellor has not moved to restrict salary sacrifice on pensions, which means that people who earn between £100,000-£106,475 and £140,000-£146,475 could take advantage of a 60 per cent tax relief if they decide to use salary sacrifice to fund a pension.

"For taxpayers at these thresholds this means a marginal rate of tax of 60 per cent," explained Nigel Callaghan, Pensions Analyst at Hargreaves Lansdown. "Instead of salary increases at this level, a salary sacrifice pension arrangement would again eliminate this tax reduction,"

Those who earn more than £43,888 - which is the higher-rate tax threshold – could also benefit from a tax relief by using salary sacrifice of about 31 per cent, because they would avoid paying 11 per cent National Insurance as well as income tax on that income.

Tom McPhail, Head of Pensions research at Hargreaves Lansdown said: "The tax and national insurance measures announced look set to make salary sacrifice pension arrangements even more attractive than they are now."

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