Update
2010
Budget changes made in 2009 mean that those who earn £130,000 or more and use salary sacrifice may not receive the effect of higher rate or additional rate tax relief on their pension payments. However, any salary sacrifice agreement in position before 22 April 2009 for those earning more than £150,000, or before 9 December 2009 for those earning between £130,000 and £150,000, will be unaffected until the expiry of the agreement.
Tax Relief
Limits
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 percent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'.
For the tax year 2010-11 the annual allowance is £255,000 and for the 2009-10 tax year it was £245,000. You pay tax at 40 percent on any contributions you make that are above the annual allowance.
If your income is £130, 000 or more
The government has announced that from April 2011 the amount of tax relief you can get will be reduced if your income is £150,000 or more.
From April 2009 a 'special annual allowance' was introduced to stop people making large additional pension contributions and getting higher rates of tax relief on them ahead of April 2011. The special annual allowance will affect you if all of the following apply:
your total pension savings – including employer contributions - are more than £20,000
you change the amount you normally save towards your pension – on or after 22 April 2009
your income is £150,000 or more in the current or either of the two previous tax years
Your special annual allowance is normally £20,000 less your normal pension savings. You have to include any amount by which your pension savings have gone over your special annual allowance on your tax return.
The government has also announced that from 9 December 2009 the special annual allowance will apply if your income is £130,000 or more. The allowance will apply in the same way as for people whose income is £150,000 or more except that it will apply in relation to changes you make to the amount you normally save towards your pension on or after 9 December 2009.
Salary Exchange/Sacrifice
Examples
Basic Rate Tax Payer 2011/2012
This example is for Lisa Bowman earning £30,000 per annum and currently paying a net contribution by direct debit into her personal pension plan of £200 a month. The client benefits from tax relief at source therefore the gross pension contribution will be £250.00 per month.
By using the Salary Sacrifice method Lisa reduces her salary to £26,470.59 per annum and the employer makes the monthly pension contribution on her behalf. With savings of tax & NI made by the employee and employer the amount payable into the pension has increased to £334.71 a month. This is an increase of £84.71 monthly (£1016.52 each year) at no extra cost to either the employee or employer.
Lisa has 'spendable income' of £1,696.86 before salary sacrifice and also £1,696.86 after salary sacrifice even though there is an extra £84.71 being invested into her pension each month.
View the actual system generated calculation PDF document here:
Further examples are available to view in the demo version of SalSac.
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 percent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'.
