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My employer’s pension works on a “salary sacrifice” basis. What are the tax and National Insurance advantages for a 40 per cent taxpayer? I have also signed up for employee benefits such as dental insurance that claim to offer tax and NI savings. But could these perks affect or reduce my pension or state benefits by reducing my total income or NI contributions?
Iain Henshall, principal employee benefits consultant at wealth managers Towry Law, says that by opting for salary sacrifice on your pension, your salary will be reduced by an agreed amount before it is assessed for income tax and NI and the company will invest the sacrificed amount into your pension. From an income tax perspective, you will benefit from having the 40 per cent tax relief invested into your pension and do not have to make additional claims through your tax return.
Additional savings come through NI: assuming your income, after the sacrifice, stays above the upper earnings limit (£34,840 in the 2007/08 tax year) you will save 1 per cent NI on the amount of sacrificed salary. The real benefit could come if your employer passes on some, or all, of the 12.8 per cent employer NI saving in the form of extra pension contributions.
Most other employee benefits will be treated as a P11D taxable benefit. So while you, as a higher rate taxpayer, would save 1 per cent NI, there will be no further tax savings.
Opting for any salary sacrifice arrangement will constitute a permanent change to your terms and conditions of employment. State pension benefits will not be affected by salary sacrifice unless the sacrifice reduces income to below the upper earnings limit which can impact the State Second Pension.
The reduction in salary could impact Statutory Maternity Pay, Statutory Sick Pay and Statutory Paternity Pay. Lowering your salary in this way might also affect your ability to obtain a mortgage or other loan.
A reduction in salary in exchange for other perks might also impact on other benefits provided by your employer such as life insurance, bonus payments, salary reviews, holiday pay, overtime rates etc. Check with your employer that it provides these other benefits based on your pre-sacrificed salary before deciding if salary sacrifice meets your needs.
FT Money recently (May 5/6) ran a reader’s question about a widow who was worried about inheritance tax giving a share of her house to her live-in son. As long as the widow survived seven years, this share would not be subject to IHT, the answer suggested, and there would be no stamp duty on the gift. But what are the IHT and other implications if the child left home or died before the seven years were up?
Christopher Groves at solicitors Withers says that the gift of the share in the house would be a potentially exempt transfer (Pet) and if her son were to cease to occupy the house (even after the seven years), a reservation of benefit would arise. This would mean the share in the son’s name would be included in his mother’s estate and subject to inheritance tax on her death.
If the mother were to die within seven years of the gift, both the value of the gift (as a failed Pet) and the value of the share (as a reservation of benefit) would be included in her estate, though only the item that gave rise to the higher IHT bill would actually be chargeable.
The gift with reservation could be avoided if the mother were to pay a market rent in respect of her continuing occupation of her son’s share. There is also no requirement that the occupation of the mother and the son should be of the same degree of intensity. It is therefore possible that the gift with reservation might not arise where the occupation of the son changed but remained similar to that of his mother.
Even if there were no reservation of benefit, if the mother were to die before the seven years were up, there would be a liability in her estate for the tax due on the now failed Pet. If the son were also to die, his share of the house would form part of his estate. So-called quick succession relief could apply to relieve part of the double charge to IHT in these circumstances.
While living in the Netherlands I paid around £40,000 into an offshore Maximum Investment Plan (Mip) from 1984 to 1997. I then returned to the UK and made the plan paid-up. It is now worth around £90,000. What are the tax implications of taking the benefits now? I am a 65-year-old widower with a basic state pension and £5,500 a year from other investments.
Tim Gregory, partner in the private wealth team at accountants Saffery Champness, says that while the profit you have made principally comes from the increase in the value of your investment, it is taxed as income rather than as a capital gain.
As it is an offshore plan, there would have been no UK tax deducted at source from the returns throughout the plan’s life. This means there will be no tax credit available when you cash it in, and the profit is taxable at your marginal rate. But while this might be thought to mean that a large part of the £50,000 would be taxed at 40 per cent, this is not the case.
The profit is spread over the life of the plan, but only for those years in which you have been UK resident – 10 in your case. That means £5,000 per year. However in spite of this spreading, tax is charged only in respect of the year in which the plan is encashed. Also, the applicable rate across the 10 years is assumed to be the same as your rate in the year in which the plan is encashed. Even if you were a higher-rate taxpayer up to 2006/07, your current income dictates that the rate is just 22 per cent.
If you were to cash in the plan now, the tax liability would therefore be £11,000. Cashing in part now, and the rest later, would not really improve the tax treatment.
The profit is potentially chargeable in both the UK and the Netherlands. You should be able to obtain double tax relief so that the maximum amount of tax is equal to the higher amount between the two countries.
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