Earn Over £100K or £125K? Salary Sacrifice Even More Urgent After Budget 2022

Published / Last Updated on 23/11/2022

The Autumn Statement (Budget) 2022 has now made it even more important for those earning over £100,000 and in particular, those earning over £125,140 to plan.

Earn Over £100,000

For every £2 you earn over £100,000, your tax-free personal allowance of £12,570 is reduced by £1.  This means that if you earn £125,140, you are £25,140 over £100,000 meaning on he £2 over for £1 personal allowance reduction, your personal allowance is zero i.e., 100% of your income is taxed.  This is an effective tax rate on that excess £25,140 of over 60%.  This is a massive additional income tax bill of £5,208.

Earn Over £125,140

As well as the loss of the tax-free personal allowance (£12,570), the autumn statement confirmed that earnings over £125,140 with be taxed at Additional Rate Tax of 45% from April 2023 rather than the current level of £150,000.   If you earn £150,000, this means from April 2023, you will be paying an additional £1,243 in tax each year.

Salary Sacrifice

This is an arrangement with your employer where you agree to reduce your income in exchange for pension contributions by your employer.  The benefits to sacrificing your salary for additional pension contributions are as follows:

  • No employer’s or employee’s national insurance contributions are payable on the salary sacrificed pension contributions saving both you and your employer money.
  • You pay no income tax on your additional employer’s pension contributions that you would have paid if you had taken it as salary rather than pension.
  • Your additional pension funds growth tax free.
  • You are building up your pension fund for retirement at a faster rate.

Salary Sacrifice Examples:

  • Income £150,000.  Sacrifice £24,860 in salary (taking you down to £125,140) and paid in pension contributions will save you £1,243 pa in income tax plus employers and employees national insurance contributions.
  • Income £125,140.  Sacrifice £25,140 in salary (taking you down to £100,000) and paid in pension contributions will mean you get the whole of your tax-free personal allowance of £12,570 back (as you avoid the £2 for £1 rule) and save you a massive £5,028 pa in income tax plus employers and employees national insurance contributions.

Act now and talk to both us and your employer about salary sacrifice to save tax and boost your pension. 

Earn £200,000+?  If you earn more than £200,000 you should contact us for specific advice as there are additional rules that may affect you in connection with calculations for ‘Threshold Income’, ‘Adjusted Income’ and the reduced pensions annual allowance called tapered annual allowance.

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