Occupational Pension provides NI benefits ?

[tamilyrn]

I currently have a Personal Pension from which my contributions are grossed up to 20% and from which I can claim additional relief as I am a high rate tax payer.

As a (non-shareholding) director I am exploring possible benefits of having the company contribute into my PPS. I can't quite get my head around whether this is a win or not.

As an example, if I sacrificed £3000 of my salary and the company then contributes £3000 to my pension are the following assumptions correct ?:

- Neither me nor the company pay NI on the £3000; a potential saving of 11% (me) plus 12.8% (company). I stand a reasonable chance of having the company percentage of this added to the contributions.

- The contributions are not grossed up but then they are not taxed in the first place so this makes no difference.

- My tax liability is actually less as I have salary sacrificed.

Am I missing something here ??

Thanks.

[Ian Martin]

Hi Tamilyrn

Your summary of the benefits of salary sacrifice is broadly correct and it is a very effective, widely used, method of enhancing pension planning

Your saving in NI won't quite reach 11%, because you mentioned you are a higher rate tax payer and you only pay 1% NI on earnings above the Upper Earnings Limit (£43,875 this year); however your employer will gain 12.8% NI saving

The contributions are made gross by your employer and are, in most cases, allowed as a business expense

Your taxable income is reduced as part of the arrangement and thus your tax liability will be lower. However, to be valid, the arrangement has to be confirmed in writing to form either a permanent reduction of your salary or a temporary one for a term of at least 12 months - otherwise you may still be liable for tax and NI. Also, it is worth bearing in mind that the arrangement must be in place before the employee receives the salary or bonus - not after the event!

Most of the potential drawbacks are fairly obvious, but include the following: most non-salary benefits are linked to the level of contractual salary - life cover, PHI etc are normally based on salary; holiday pay, future salary increases etc are based on contractual salary; some state benefits are salary related; mortgage borrowings are limited by reference to salary

I hope this helps but please get in touch if you would like advice relating to your personal circumstances

Kind regards