how does financial education work in real life?

Here is a case study example with an employer saving at least £1,380 following a day of education – Claire age 59.

Meet Claire:

  • She’s 59 years old;
  • Is paid £60,000 a year
  • a higher rate tax payer;
  • currently works full time and intends to reduce her hours closer to retirement; and
  • has savings in a Cash ISA which she plans to use when she stops working.

Claire attends a financial planning workshop with a group of her colleagues to understand more about her options.

Following the workshop:

  • Claire decides to exchange £10,000 of her salary for an employer pension contribution of the same amount.
  • Because of this she doesn’t pay £4,000 in income tax, or £200 in NIC on this part of her salary.
  • As a result, Claire’s take home pay is actually reduced by £5,800, despite £10,000 being paid into her pension.
  • If Claire finds she needs the lost income, it could be replaced by withdrawing money from the ISA.
  • By organising her finances in this way, a withdrawal from her ISA of £5,800 has been effectively replaced with a £10,000 pension contribution.

Now in full time retirement, Claire receives £20,000 a year from her other pensions. Because of this, Claire is now a basic tax rate payer.

Claire decides she now wants to take £10,000 from her pension pot she invested after the education she received at work.

Taking the money in this way will impact on future contributions Claire can make to pensions but as she has already fully retired, this is not a concern.

  • 25% of what she takes (£2,500) can be paid tax free,
  • the remaining taxable money (£7,500) is taxed at 20% - (£1,500 tax).
  • £8,500 would be paid out to Claire after tax
  • This has only cost her £5,800 in contributions.

By reviewing her financial plans, Claire’s made some great savings. Claire’s employer also achieved a significant saving in national insurance as a result of her decision.

Through making a £10,000 payment into Claire’s pension instead of paying this amount in salary, the employer saved £1,380 in NIC’s (13.8%). If Claire did this, every year she was employed, both parties would make savings.

If multiple employees made similar salary exchange decisions, the employers’ NIC savings would increase too.

Act now

The tax and NIC savings achieved above through using salary exchange, are based on current tax reliefs given to pension contributions and salary exchange schemes (2018).

How much can your business save? Call the team to find out.

Get in touch with a Salary Exchange expert

Salary Exchange frequently asked questions

Will I have to change my company pension scheme to start salary exchange? 

Moving to salary exchange does not mean changingthe pension scheme, it’s just a different way of deducting employeecontributions from pay.

Will salary exchanging pensions contributions impact my employees’ mortgage applications? 
Although an employee is reducing their gross taxable pay, their pre-salary exchange “reference salary” can be maintained for all other purposes e.g. company life insurance, future pay rises and mortgage references.
Will employees on low incomes be suitable to participate in salary exchange arrangements?
Salary Exchange will not benefit those who do not pay National Insurance. In addition, Salary Exchange cannot reduce an income below the national minimum/living wage. Low earners should be identified and excluded from the exercise.
Will employees still qualify for their State pension?
State pension is not affected as long as the employee continues to pay National Insurance