National insurance has increased in price. This will affect all workers whose annual income exceeds £9,568. But is there a way to legally avoid the 1.25% increase in national insurance?
Here, I investigated a little-known tax rule and showed how it can help you keep more hard-earned cash.
What are the tax rules?
So what is the magic secret? This is the so-called sacrifice of wages, which is a legal way to reduce national insurance bills. It works by reducing your taxable income without reducing the money in your pocket.
How does the wage sacrifice work?
The salary sacrifice is related to the money paid to you Company pension plan.
This means that you agree to the employer’s wage reduction. The difference between your original salary and the lower agreed salary will be directly included in your company pension plan.
Usually, payments from pension companies will reduce your income tax bill, but they still need to charge them national insurance premiums. However, by sacrificing wages, your company pension plan payments will not attract income tax or national insurance.
Here are two examples to make it more clear:
- Paul has an annual salary of £50,000, and he does not sacrifice his salary. He pays 5% of his salary to the company pension plan (£2,500 per year) through PAYE. He is taxed on income of £47,500 because pension plan payments are tax-free. But he paid the entire national insurance premium of £50,000.
- Gita’s income is also £50,000. She agreed that her employer sacrificed 5% of her salary. Her taxable income fell to £47,500, but the company paid £2,500 directly to her pension plan. She saved income tax and national insurance on pension payments.
In these examples, Geeta saved 338 pounds (13.5 percent of 2,500 pounds) in national insurance payments compared to Paul due to the use of wage sacrifices. She ends up with the same amount of cash every month, but pays an extra £338 each year to her pension plan.She can contribute an extra £3,380 to her Pension can In 10 years.
How much can you save on National Insurance?
By using wage sacrifices, you can save a lot of national insurance. The amount you save depends on your income and how you pay for your pension plan. If your income is £50,000 and you contribute 5% to your company’s pension plan, then sacrificing wages will save you £338 in national insurance contributions each year.
If your income is £25,000 and you contribute 5% to your pension plan at the expense of wages, you will save £169 in national insurance contributions each year.
What do you need to save National Insurance?
If you want to sacrifice salary, please ask your employer’s human resources department if it can be used in your company. Not all companies offer it as an option. You will usually receive a form to fill out to confirm that you are willing to sacrifice your salary.
Is there anything else to consider?
When you consider sacrificing salary, there are a few other things to consider:
- It may affect the loan or Mortgage application. Your total salary will decrease with the sacrifice of salary, so if you are moving or remortgaging soon, this needs to be considered.
- If you are a low-income person, reducing your national insurance contributions may affect your right to a basic or full state pension when you retire.an examination Government website More information about national pension eligibility.
- Salary sacrifices may also affect the level of other benefits, such as maternity leave pay or your life insurance level.Consult your union or Citizen advice Want more information.
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