Optimise Accountants -

Pension Contributions Financial Benefits: Tax & NI Reliefs, Child Benefits, Personal Allowances and Pension Contribution Limits

May 26, 2017

pensionPension Calculator

By Louise Misiewicz

Are you thinking of investing for the future?

Have you thought about the various tax and financial benefits that pension contributions can provide?

Our team of property tax experts are on hand to best advise our clients on how to help you invest for the future, whilst benefitting from all the tax reliefs and financial benefits within your specific allowances.

We have written many articles on the subject of pensions, including the below:

Tax relief on pension contributions 

Pension contributions limited to £10,000 for high rate tax payers

Tax relief on SIPP pensions

Utilising Your UnCrystallised Pension In A Tax Efficient Way

As we have shown in the above blogs, that you may be able to invest into your pension from £3,600 to £40,000 per year dependent on their income streams. Any money invested into your pension within reason may attract income tax relief. Therefore, the government are incentivising you to invest into a pension.

I felt that the above articles were helpful in their guidance in regards to tax relief on the pension contributions that you/your employer makes. However, it struck me that there were other benefits if you entered into a salary sacrifice scheme when making pension contributions.

National Insurance savings

I am sure that you are aware that you and your employer pays national insurance contributions as will be seen by the HMRCs website. At a high level, you will see that employers will pay 13.8% and employees will pay at the highest rate 12%. If we look at this in cold light of day the highest NI charge by both the employee and employer is 25.8% on an element of earnings.

Employees pay (in general):

  • 0% for earnings up to £8,164
  • 12% from £8,164 to £45,032
  • 2% for earnings above £45,032

Employers pay (in general):

  • 0% for earnings up to £8,160
  • 13.8% for anything above £8,160

If you a basic rate tax payer was to make pension contributions of say £1,000 as part of the salary sacrifice scheme then the employee would save £120 and the employer would save £138. That is a £258 saving, or put it another way, a saving of 25.8% on just National Insurance contributions.

As with the basic rate taxpayer, the employee would also receive tax relief of 20% of the contributions made. As such the government would add 20% (£200) to the contributions made. This now provides a total saving of:

  • £120 national insurance
  • £200 income tax
  • £320 total savings

If we also took into account the employer national insurance savings:

  • £320 employee income tax and national insurance savings
  • £138 employer national insurance savings
  • £458 total savings

As I am sure you will agree, this is a significant amount. We should also remember that the earnings (both capital growth and income) derived in a pension is also tax-free and will remain so until you retire.

Child Benefit

If you are an employee and you have a offspring then you may be aware that you can claim child benefit from the government. The amount that you can claim is:

  • £20.70 per week for the first child
  • £13.70 per week for each child thereafter

You normally qualify for Child Benefit if you’re responsible for a child under 16 (or under 20 if they stay in approved education or training) and you live in the UK.

If you have not done so already you can make a claim by using this link.

You may also be aware that child benefits are reduced if you or your spouse earn more than £50,000. Any excess of the £50,000 will be charged against the child benefit that you have received. This tax charge will be taken via your self-assessment as part of the work we do for our clients.

Earned salary less £50,000:

———————————     (% result) X Child Benefit Received

100

Someone earning £55,000 would therefore have a tax charge of:

50% = £5,000 (£55,000 less £50,000) divided by 100

£538.20 = 50% (above) £1,076.40 (52 weeks X £20.70).

If the employee in question had invested £3,000 into the pensions he and the employer would have received the following savings:

  • £60 – 2% employee national insurance contributions at the high rate tax band
  • £1,200 – 40% income tax relief
  • £538.20 child benefit tax charge avoidance as they now earn the limit of £50,000
  • £1,798.20 total savings

If we also considered the employer’s savings we would see total benefits of:

  • £1,798.20 Employee savings: income tax, national insurance and child benefit tax charge avoided
  • £414 employers national insurance savings (13.8% X £3,000)
  • £2,212.20 total savings enjoyed by the employer and employee

The savings of £2,122.20 is now 73.7% of the £3,000 originally invested.

 

Personal allowances lost

At the time of writing, you can earn £11,500 before you pay tax, otherwise known as personal allowance

If you earn more than £100,000 then you will be aware that your personal allowances are being eroded by £1 for every £2 of earnings above £100,000.

Someone that earns £120,000 would lose an element of their personal allowance, as follows:

  •  £20,000 Excess of earnings limit =  (£120,000 earnings less the £100,000 limit)
  • £10,000 Reduction to personal allowance (£20,000 excess divided by 2)
  • £1,500 Revised personal allowances (£11,500 less £10,000)

However if the employee decided to invest £20,000 into the pension the following savings would apply:

  • £4,000 tax saving on their personal allowances £10,000 saved from being lost
  • £8,000 income tax savings (40% of the £20,000)
  • £400 employee national insurance (2% of the £20,000)
  • £12,400 total savings

As you can see that anyone that earns above £100,000 and are able to invest into a pension ought to seriously think about it. The savings would be 62% (£12,400 divided by £20,000) of the £20,000 pension contribution.

Cash flow analysis

Now let’s take a look at the take home pay for the employee above making the pension contribution:

  • £4,000 tax saved on their personal allowance
  • £8,000 income tax saved on their pension contributions
  • £400 national insurance saved
  • (£20,000) pension contributions
  • (£7,600) employee takes less home per year

Albeit the employee takes home £7,600 less per year we must not forget that they now have a pension investment worth £20,000. In fact, it is safe to say that they purchased a £20,000 investment for 62% below market value.

Step by step guide to implementing this strategy

It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:

  1. Speak with your employer about making pension contributions via the salary sacrifice scheme
  2. Ensure that you are claiming child benefit from the government
  3. Ask your employer about child care vouchers as part of another salary sacrifice scheme

How to engage with us

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.

Please use the redeem code “Article 33” to get 33% off your next consultation call.

If you are looking for a new accountant, then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



Get your FREE ebook "Property Investors Guide"
Enter your information to recieve the eBook

First Name:*
Last Name:*
Lead Source:*
Email:*
Phone:*

Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk