Latest news with #salarysacrifice
Daily Mail
3 days ago
- Business
- Daily Mail
I've had a big pay rise to £125,000 should I salary sacrifice as much as possible into my pension?
I earn £105,000 a year and have just been promoted with a £20,000 annual pay increase from June. I am wondering if I should salary sacrifice as much as possible into my pension in the next few months. My work pension is a salary sacrifice scheme, which helps me save on national insurance and tax and has the double benefit of lowering my income, as I earn above £100,000 and get hit by the 60 per cent tax rate. My promotion and pay increase will fall almost entirely into that 60 per cent bracket and after reading reports this week, I am worried that the government will change the system, and I will lose out. I could theoretically afford salary sacrifice most of my monthly earnings over the next four months into my pension, to get as much in there as possible and reduce my income this tax year. My employer says it will let me do this, but would it work from a tax perspective? Simon Lambert, of This is Money, replies: It's fitting that this question crops up in the week that NatWest, formerly known as RBS, finally fully exited taxpayer ownership. The two may not seem directly related but the 60 per cent tax trap is a financial crisis hangover. Britain's stake in RBS came about due to the exceptional circumstances of the financial crisis. Cast your mind back that far and there were also some stringent tax measures brought in to deal with an urgent need to raise funds. Unfortunately, the one you refer to that creates the 60 per cent tax trap is still with us, long after the emergency passed. In April 2009, Chancellor Alistair Darling announced the personal allowance would start to be removed at a rate of £1 for every £2 earned above £100,000. This created Britain's highest effective official income tax rate of 60 per cent. There are other quirks that can drive up marginal tax rates - the amount you pay on the next pound - but they depend on specific related circumstances, whereas the personal allowance removal is baked into the income tax system. If the £100,000 threshold had moved up in line with RPI inflation, it would now be at £180,000, according to our historic inflation calculator. The only real way to beat the tax trap is to get your income down and salary sacrifice has become a popular way of doing this, with people in the bracket often paying as much as possible into a pension. Reports last week suggested salary sacrifice was in the Treasury's sights, as a way to claw more money in and an official report has been compiled. It remains to be seen whether rumours are true, but you should be careful about making financial decisions based solely on saving tax. We asked an expert about where you stand on salary sacrificing as much as possible of your pension. Anita Wright, chartered financial planner at Bolton James, replies: From a tax perspective, making significant pension contributions via salary sacrifice by the tax year end on 5th April 2026 is likely to be highly beneficial — particularly given your earnings position and the structure of your employer's scheme. Since your new total income for the 2025/26 tax year will be £125,000, you fall squarely within the band where the personal allowance is gradually withdrawn. Between £100,000 and £125,140, your personal allowance (the amount of income you can receive tax-free) is reduced by £1 for every £2 earned above £100,000. This results in a 60 per cent marginal tax rate on income in that range. Once your income exceeds £125,140, you lose the personal allowance entirely. By using salary sacrifice to reduce your gross income below £125,000, you will recover some, or all, of your personal allowance, significantly improving your overall tax position. One of the core tax benefits of your employer's salary sacrifice scheme is that pension contributions are made fully by your employer, meaning they are exempt from both income tax and employee National Insurance (NI) unlike receiving additional salary. This typically results in a more efficient outcome than making contributions from your net pay. In addition, employers also benefit from a reduction in their own NI liability when salary sacrifice is used. Some employers choose to pass part or all of their NI saving into the employee's pension plan, thereby boosting the overall contribution at no additional cost to you. This is worth checking directly with your HR or payroll team, as it depends entirely on your employer's policy. Your ability to do this successfully — and how much you may wish to sacrifice — will depend on several factors: While you note that you can manage without much of your take-home pay, it's important to bear in mind that salary sacrifice will reduce your monthly net income — which would otherwise have been higher had you taken the additional salary instead. Annual Allowance: For most individuals, the pension annual allowance is £60,000 for the 2025/26 tax year. However, this includes both your contributions and those made by your employer. Contributions above this threshold may trigger an annual allowance charge unless unused allowances from previous years can be carried forward. · Impact on Benefits: A reduced gross salary might affect other employment-related benefits. For example, some death in service schemes or income protection policies are based on actual salary. That said, many employers calculate benefits using your notional (pre-sacrifice) salary, but this should be confirmed. Borrowing capacity: Mortgage lenders and other credit providers often assess affordability based on income and expenditure. A lower reported income due to salary sacrifice could impact your borrowing potential, depending on the lender. A salary sacrifice arrangement can be put into place at any point, but must meet the following criteria: A formal written arrangement must be in place. This must be in place before the salary is actually reduced. The arrangement must not take your salaried remuneration below minimum wage with regards to the hours worked. You also must not also be able to demand a switch back to full salary, otherwise HMRC may contend that a valid exchange has not taken place and implement the appropriate tax treatment that you may receive less take home pay. Should you worry about salary sacrifice being cut? Finally, while current pension legislation offers significant tax incentives, your concerns about potential future changes are entirely understandable. Although no formal announcements have been made, it is natural for higher earners to consider acting sooner rather than later to optimise the available reliefs under current rules. It is widely understood that the previous government commissioned a detailed report on salary sacrifice, examining its cost to the Treasury and exploring ways to potentially limit its use. In parallel, HMRC has recently been modelling hypothetical scenarios to assess how much additional revenue could be raised through reform. This suggests that salary sacrifice is firmly on the policy radar — and may well be considered by the current Chancellor as part of a broader effort to increase tax revenues. While no decisions have been made, the direction of research implies a growing likelihood that changes could be introduced in the next Budget.
Telegraph
28-05-2025
- Business
- Telegraph
Rachel Reeves is recklessly destroying the British pension
For a Chancellor of the Exchequer under pressure to increase the Government's tax take without appearing to raise taxes, it looks as if pension schemes may be next in the firing line. Rachel Reeves faces her first full spending review next month with the public finances in a desperate state; annual interest payments on the national debt are running at more than £100billion and the Labour government has proved incapable of turning the spending taps off. With pension funds – and pension contributions – seen as an easy target for a Government that has run out of money, HMRC's report this week on the subject of 'salary sacrifice' schemes looks suspiciously well-timed. Reeves wouldn't be the first Labour Chancellor to squeeze the British private pension sector, which was once the envy of the world. The rot set in when Gordon Brown started taxing pension funds on dividends from their investments, at a cost to those funds of around £10billion a year. In her autumn statement last year Reeves took a swing at personal pension pots by announcing her decision to end inheritance tax relief on unspent pensions, which previously could be passed on tax free if a saver died before the age of 75. And pension providers are now being put under pressure by the Government to invest only in British firms, despite the fact that the returns from those investments may be lower as a result, penalising participants by reducing their retirement income. Salary sacrifice pension schemes, the subject of the HMRC report, are offered to employees by around half of the UK's companies. Pension contributions are deducted from salary free of income tax and national insurance, providing an incentive to the employee to build up a pension and an opportunity for the employer to reduce the cost of NI. HMRC has taken soundings on the use of such schemes, noting the value to employees and companies, and working out how the withdrawal of the reliefs would affect an individual's net income. Unsurprisingly the biggest impact is on employees with high salaries. But it's clear that the incentive effect is strongest for those whose income is closest to tax thresholds: the prospect of paying tax at 40 per cent rather than 20 per cent is a powerful reason to sacrifice the top slice of income. For parents threatened with the loss of child benefit if they start moving into higher rate tax, for example, it's a no-brainer. But to the Treasury such incentives are seen only in terms of a reduced tax stream. The risk that employees will be less likely to build up a pension, or that employers might decide that operating such a scheme is no longer viable, will be of no concern to the Chancellor because it won't show up on this year's balance sheet. It is of course perfectly logical to offer tax relief on pension contributions: revenue forgone by the Government in the short term will be recouped later when the pension is drawn down as income. But for a Government thinking only about the next set of elections, the temptation to raid pensions now, rather than find any cuts to bloated state expenditure, will probably be too great to resist. The HMRC report is therefore likely to be seized upon by the Treasury hungry for any scraps to help balance the books. The slow death of the UK's pension industry will be accelerated, but will anyone in this Labour Government notice or care?
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The Independent
28-05-2025
- Business
- The Independent
How your pension salary sacrifice works - and what HMRC tax changes would cost you
The publication of government research undertaken by HMRC around changes to workplace pensions has caused a stir, with the suggestion that the salary sacrifice scheme used by many working people in the UK might be set for an overhaul. This research questioned how businesses felt about prospective changes which would see pension contributions subject to income tax and National Insurance payments, resulting in an annual cost of up to £560 for employees and £241 for employers, based on an average £35,000 salary. Presently, most workers are auto-enrolled into saving into their pension automatically, though there are different thresholds, methods and benefits around this. The principle attraction here is that the money is taken from salaries to go into pensions pre-tax, giving relief to the rate of each person's tax band. HMRC's survey of more than 50 companies, commissioned under the previous government but only released by HMRC now, showed that most viewed the proposals for change negatively - though the Treasury has dismissed suggestion of impending alterations as 'totally speculative' and said all areas of tax are 'regularly' subject to research. 'This is a private HM Revenue & Customs consultation initiated in 2023 and it's far from certain that the Treasury has any intentions around salary sacrifice, but it's not the first time that it has come under the spotlight as a potential area for shoring up the tax take,' Gary Smith, financial planning partner at Evelyn Partners, explained to The Independent. Difference between DB and DC Defined benefit (DB) schemes are most frequently seen in the public sector and offer a set, guaranteed amount of income in retirement. They can be on a final salary basis or a career average, with employers funding it. Defined contribution (DC) schemes are much more common and many workplaces use them for auto-enrolled employees. Here, your eventual pension amount depends on how much has been put in across your working life, plus the returns earned on that invested money by pension providers. As such, they can vary wildly in value and even in terms of timing when is best to access them, depending on external factors like the stock market. Employee and employer pay in at least eight per cent combined, though many employers may pay in more than their minimum three per cent to match an employee's contributions. Boosting contributions to workplace pensions A crucial tool workers have in ensuring they have enough to fund their retirement is to up their own pension contributions across the years. Adding slightly more if you get a raise, for example, can have a material impact later down the line. And if you're able to comfortably reduce your immediate income, checking your workplace options to see if you or your employer contributes more is another way to make sure future you is facing a bigger retirement pot. Salary sacrifice it is not limited to just pension contributions. Childcare vouchers, vehicles or other benefits can come under salary sacrifice schemes. HMRC proposals and what they would mean for you It's important to note that the research published is not something imminently coming into force, or that any changes might occur at all right now. But pensions are subject to change - it's only a little over a decade since auto-enrolment came into force, remember. Changes such as these researched ones might have a massive impact though, not just in what you're left with decades down the line, but whether companies would even operate it any further. 'Salary sacrifice (SS) is a very efficient and effective way for employees to save into pensions, and it seems inevitable that watering it down – or dismantling it altogether - would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more Government interference,' added Evelyn's Mr Smith. 'After the Chancellor's Budget statement, when she announced an increase to employers' National Insurance from April 2025, salary sacrifice arrangements for workplace pension schemes became more attractive for many employers, because of potential NI savings. If SS reform were to be seriously considered, employers who have introduced or started to introduce SS will be wondering which way to turn. 'Making pension contributions via salary or bonus sacrifice is a popular option for those whose earnings might fall into the 60% tax trap, a zone between £100k and £125,140 where the combination of high-rate tax and a tapered reduction in their tax-free personal allowance leads to a highly punitive effective income tax rate of 60%, which for many families is worsened by the withdrawal of child-care benefits. 'The fault here lies with an unfairly structured income tax and benefits system that penalises people in this situation disproportionately for increasing their earnings. Removing a perfectly legitimate mitigation strategy - increasing pension contributions via SS - would seem harsh without reforming the disincentivising tax step itself.'
The Sun
28-05-2025
- Business
- The Sun
Tax raid on pensions by HMRC under plans from Rachel Reeves
THOUSANDS of workers could miss out on vital pension cash under plans mooted by Rachel Reeves. HMRC is exploring a shake-up of the salary sacrifice scheme used by employers which could see staff lose out on up to £560 a year. 1 Salary sacrifice allows someone to voluntarily give up part of their salary to put towards benefits like extra workplace pension contributions. Its major advantage is that it means workers pay less income tax and National Insurance on the portion of their pay that is sacrificed. However, research paid for by HMRC and published yesterday reveals "hypothetical" plans to reduce the perk. The fieldwork, carried out under the previous Government between May and August 2023, asked 51 firms to comment on three proposed changes to the way salary sacrifice works. The first included removing the NI exemption for employers and employees, meaning workers and bosses would have to pay NI on the salary sacrificed. The second included removing both the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed. The third would involve removing the NI exemption but only on salary sacrificed above a £2,000 per year threshold. If the plans to remove NI relief and income tax relief for a worker on £35,000 a year went forward, it would cost them £560, HMRC estimated. The second option, proposing to remove only NI relief, would cost the employee £210. The third option, where NI relief would be removed on any amount sacrificed over £2,000, would see the worker lose out on £30, the report said. What are the different types of pensions? Employers consulted as part of the research were most negative about the option involving removing NI and tax income relief on any sacrificed salaries. Some bosses said this would effectively make the scheme pointless for them to run. Steve Webb, former pensions minister and partner at LCP pension consultants, said the research commissioned by HMRC suggested a "significant risk" of cuts in the upcoming Autumn Budget. It comes as the Government looks to fix a multi-billion pound black hole in its finances. Mr Webb added: "It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back. "Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today. "With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure." The Sun asked HMRC and the Treasury to comment. What is National Insurance? NATIONAL Insurance is a tax on your earnings, or profits if you're self-employed. These contributions make you eligible for things like the state pension and certain benefits. You'll usually pay National Insurance Contributions (NICs) when you're over the age of 16 and earning a certain amount. For example, if you earn £1,000 a week, you pay nothing on the first £242. Earn over that and you pay 10% on the next £725 - so £72.50. Then you pay 2%o on the rest, so £33, which works out as 66p. For the self-employed rates are slightly different. You can also get something known as National Insurance in some circumstances when you're not working, for example when you have kids and claim certain benefits. NICs are usually taken automatically by your employer and paid to HMRC, so you don't need to do anything. You can see how much NICs you pay on your wage slip. Anyone working for themselves usually has to pay NICs themselves when completing a self-assessment tax return. What is salary sacrifice? Salary sacrifice lets you give up a portion of your salary in exchange for a higher pension contribution from your employer. Your overall gross salary may go down but your take home pay may not as the process means you pay less National Insurance and income tax on your earnings. Your employer has to fork out less on National Insurance too, and may pass on some or all of the savings to you. Clare Moffat, pensions and tax expert from Royal London, previously gave an example of someone earning £35,000 and whose bosses share 50% of their National Insurance saving with their employees. Without using salary sacrifice, the employee would see £2,450 go into their pension each year. However, with salary sacrifice, they would see £3,129 go in each year instead - £679 more - with their take home pay remaining at £27,320. It can be not just an immediate financial boon, but a major one for later life.
Daily Mail
28-05-2025
- Business
- Daily Mail
Is Rachel Reeves planning a 'stealth' tax raid on pensions? HMRC explores shake-up of salary sacrifice schemes as Chancellor comes under pressure to fund axing of two-child benefit cap
A stealth tax raid on millions of pensions savers is 'firmly on the agenda' as Rachel Reeves looks to increase revenues, experts have said. The Chancellor is under growing pressure to raise billions of pounds to fund extra spending commitments and rising borrowing costs ahead of her autumn Budget. This could include having to find the money to pay for the scrapping of the two-child benefit cap, following demands by Labour MPs to lift the restriction on welfare. Amid the increasing strain on the public finances, HMRC has been revealed to have explored a shake-up of the salary sacrifice system used by pension savers. This allows employees to voluntarily give up part of their wages to pension contributions in order to lessen the income tax and National Insurance due on their salaries. Such schemes are often used by higher earners to avoid 'cliff edges' in the tax system, amid the long-running freeze to income tax thresholds. HMRC recently commissioned research to explore three different options for altering salary sacrifice arrangements for pensions. This found that an employee on a yearly salary of £35,000 could lose more than £500 if the Government looked to raise more tax revenue from pension savers. A stealth tax raid on millions of pensions savers is 'firmly on the agenda' as Chancellor Rachel Reeves looks to increase revenues, experts have said Research commissioned by HMRC found that an employee on a yearly salary of £35,000 could lose more than £500 if the Government looked to raise more tax revenue from pension savers The study looked at three different scenarios for altering salary sacrifice arrangements for pensions. The first removed the National Insurance exemption for salary sacrifice pensions, resulting in an employee on a salary of £35,000 paying an extra £210 in National Insurance, while their employer paid an additional £242. The second scenario removed both the National Insurance and income tax exemption, resulting in the employee paying an extra £560 in the combined taxes while the employer paid an additional £242 in National Insurance. The final scenario removed only the National Insurance exemption for salary sacrifice pensions beyond a threshold of £2,000 per year. This would mean that employers and employees would not need to pay National Insurance on any salary sacrificed up to £2,000, but would need to pay National Insurance on any salary sacrificed above this amount. For an employee earning £35,000 who has reduced their salary by 5 per cent, the annual amount of salary sacrificed would fall below the threshold so no additional tax would need to be paid. But, for an employee earning £45,000, reducing their salary by 5 per cent would result in £2,250 of salary sacrificed per year. The £250 above the £2,000 threshold would therefore be liable to employee and employer National Insurance, meaning the employee would have to pay £30 extra in National Insurance and the employer an additional £34. Sir Steve Webb, the former pensions minister, said HMRC's consultation put a potential tax raid 'firmly on the agenda'. The ex-Liberal Democrat MP, now of consultants LCP, told The Telegraph it was 'very revealing' that HMRC had paid for research into the response of employers. 'Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today,' he said. 'With a chancellor reportedly looking to make up a multibillion-pound hole in the public finances in her autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.' Jonathan Watts-Lay, of financial wellbeing and retirement specialists Wealth at Work, said the move was a 'stealth tax'. He added: 'It would be bad for everyone. Whether they just do National Insurance or National Insurance and income tax, the fundamental of all those scenarios is that people have less money going into their pension unless they up their contributions. 'You're basically saying to someone you either need to pay more money, or you carry on and your pot will be smaller when you get to retirement. 'There's no positive impact of it. They either take the pain, or they take the pain when they get to retirement.' As well as potentially scrapping the two-child benefit cap, Ms Reeves is also having to fund the Government's U-turn on axing winter fuel payments for millions of pensioners. In addition, both the Chancellor and Prime Minister Sir Keir Starmer are under pressure from Labour MPs to reverse other planned welfare cuts. A Treasury spokesman said: 'These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system. 'We are committed to keeping taxes for working people as low as possible.'
