My secret to ‘turbo-charging’ £900 tax is reduced to £53,000 and you won’t even notice
MILLIONS of workers will receive a £900 pay rise from next month, and a secret trick could boost this even further to £53,000.
It comes after the government announced a second cut to national insurance, taking effect from next month.
The 2p reduction in the main rate of National Insurance Contributions (NICs) was confirmed by the Chancellor in the Spring Budget.
The change means that someone earning an average salary of €35,000 will save more than €448.60 per year.
It follows a two percentage point cut from 12% to 10% that came into effect in January.
Combined with the autumn cuts, this means that 27 million workers will receive an average tax cut of £900 by 2024.
What is National Insurance?
NATIONAL Insurance is a tax on your income, or on profits if you are self-employed.
With these premiums you are eligible for, among other things, the AOW and certain benefits.
You’ll normally pay National Insurance Contributions (NICs) if you’re over 16 and earn a certain amount.
For example, if you earn €1,000 per week, you pay nothing on the first €242.
If you earn above that, you pay 10% on the next € 725, so € 72.50. Then you pay 2% on the rest, so £33, which works out to 66p.
The rates are slightly different for the self-employed.
Under certain circumstances you can also take out National Insurance if you are not working, for example if you have children and are entitled to certain benefits.
NICs are usually automatically taken over by your employer and paid to HMRC, so you don’t need to do anything.
You can see how many NICs you pay on your pay slip.
Anyone who works for themselves will usually have to pay NICs themselves when completing their tax return.
However, it is important to note that how much you save will depend on your salary, as this will affect how much you pay in NI.
The move will come as a welcome change for many who are already struggling to keep up with high utility bills and the cost of living.
But those who don’t need to touch the extra money right away have the unique opportunity to increase its value, says Canada Life.
This is done by putting the money into your company pension before you even have a chance to miss it.
And although you don’t notice it now, the extra supplement can dramatically increase the money you retire with.
John, a tax and estate planning specialist, told The Sun: “While for some these cuts will be necessary to contribute to living costs, for others there is an opportunity to improve your long-term financial future. to give a boost.
‘If you can afford to save the extra money from your pay packet for a pension, thanks to the wonders of compounding, it can make a significant difference to the size of your pension when you retire.
“You also benefit from saving income tax on any additional contributions you make, so a double win.”
He also reminded that the sooner you save for retirement the better, but it is “never too late to start”.
Everyone is automatically enrolled in a workplace pension scheme through their job if they are over 22 years old and earn more than £10,000.
It is separate from the state pension and the money will be deducted from your wages unless you opt out.
At least 8% goes into the pension. You contribute 5% and your employer pays at least 3%.
Most employers allow you to increase your contributions to whatever you want, either as a percentage of salary or in pounds and pence.
Sacrificing the NI reduction today means that when you stop working in the future, the annual income from your pot will be higher.
What are the different types of pensions?
WE list the most important pension types and how they differ:
- Personal pension or personally invested pension (SIPP) – This is probably the most flexible form of pension. You can choose your own provider and how much you invest.
- Pension in the workplace – The government has made it mandatory for employers to automatically enroll you in your company pension unless you opt out.
These so-called defined contribution pensions (DC pensions) are usually chosen by your employer and you cannot change them. The minimum contribution is 8%, with employees paying 5% (1% tax reduction) and employers contributing 3%. - Final salary pension – This is also a company pension, but what you get when you retire is determined based on your salary, and you are paid a fixed amount each year when you retire. It is often called a gold-plated pension or a DB (Defined Benefit) pension. But they are generally no longer offered by employers.
- New state pension – This is what the state pays to those who reach state pension age after April 6, 2016. The maximum payout is £203.85 per week and this requires 35 years of National Insurance contributions. You also need at least ten years to even qualify for anything.
- Basic state pension – If you reach state pension age on or before April 2016, you will receive the state pension basis. The full amount is £156.20 per week and you need 30 years of National Insurance contributions to get this. If you have a basic AOW pension, you can also receive a supplement to the so-called supplementary or second AOW pension. Those who have accrued national insurance contributions under both the basic pension and the new state pension will receive a combination of both schemes.
How much can you save if you invest the NI rebate in your pension?
Canada Life’s experts crunched the numbers to see exactly how much this increase could amount to, depending on different salaries.
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Tax relief means that when you pay €80 into your pension, the government tops it up to €100, instead of collecting 20% tax on it.
The money from your pension is also invested, for example in shares, and grows over time.
How much is difficult to predict, but Canada Life’s calculations are based on a real growth of 5%.
For example, someone on a salary of £20,000 today will save a total of £298 in NICs by 2024 just from NI cuts alone.
The total savings you invest each year over 35 years could increase your pot to £17,503.
A worker earning £25,000 a year will save £498 in a year, but if they invest in a pension this could rise to £29,250 over 35 years.
If you earn £30,000 now, you will save £698 in NICs this year, which would create a pot of £40,996 after the same period.
While if you earn the UK average salary of £35,000, the NI reduction will save you £900 per calendar year.
Once put into a pension, over 35 years, this could generate a pot of £52,861.
Would you like to know how you can add more to your pension? Please contact your employer directly.
Of course, if you need the money, you should consider whether you need the extra money now more than in the future.
Or consider splitting any increase you receive; you don’t have to enter it all.
You can also take an annual surcharge into account. This is the maximum amount you can contribute annually to your pension while still receiving tax relief.
For the period 2023 to 2024, this is £60,000, as long as you don’t have your pension money yet, which you can do at age 55 (although this rises to 57 in 2028).
Even a 1% increase in your pension contributions (just €136 per year) could increase your pension pot by €25,000.
You can also save more for your pension by changing the way your pension is invested. And that doesn’t cost a cent more.
Top tips to boost your pension pot
Don’t know where to start? Here are some tips from financial services provider Aviva on how to get started.
- Understand where you start: Before you think about your plans for tomorrow, you need to understand where you are today. Look at your current pension savings and investigate when you are eligible for the state pension and how much support you will receive.
- Benefit from your company pension: All employers are legally obliged to provide a company pension. If you save, your employer usually also has to contribute.
- Take advantage of online planning tools: Financial service providers Aviva And Royal London have tools that give you an idea of what your retirement income will be, based on how much you save.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisors to help you plan for your future retirement.
Do you have a money problem that needs to be solved? Get in touch by emailing money@the-sun.co.uk.
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