Standard Life PBR comment

Salary sacrifice increasingly attractive as NI increases

Further National Insurance increases from April 2011 The budget confirmed that all National Insurance rates will increase from April 2011 by 1% (an increase of 0.5% had already been announced, with today's PBR adding a further 0.5% increase).

Andrew Tully, Senior Pensions Policy Manager, at Standard Life said: 'Putting in place a salary or bonus sacrifice arrangement is likely to prove a popular option for many people.

Sacrificing salary or bonus to reduce National Insurance can be part of an effective tax planning strategy.

However, the associated changes to higher rate pensions tax relief means those people with incomes of GBP130,000 and over may not find salary sacrifice in exchange for an employer pension contribution an attractive option.

What is salary sacrifice? Salary sacrifice allows an employee to give up part of their pay in exchange for an alternative non-cash benefit.

It offers tax and national insurance savings, allowing greater employee benefits (such as pensions) at no extra cost to the employee or employer.

Salary sacrifice is growing in popularity, both as a way of making pension payments and for other benefits like childcare vouchers.

These changes to National Insurance make it even more tax efficient.

The benefits of salary sacrifice: Income tax is calculated on the lower (sacrificed) salary - a saving of 20%, 40% or 50% of the amount sacrificed.

In addition National Insurance is paid on the lower salary.

After the increases in 2011, this will give a saving of 12% of earnings below GBP43,888, and 2% of earnings above that level.

The employer will also saves 13.8% NI and many employers use some, or all, of this saving to boost the employee's pension contribution.

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