Tag Archives: investment

Claire Trott, Financial Planning Week tip: The benefits of salary sacrifice

A reminder of the benefits of salary sacrifice


It has become common practice for employees to sacrifice part of their salary and/or bonus in return for their employer paying the amount sacrificed as an employer pension contribution on their behalf.

This can be far more attractive than the employee making a direct pension contribution, particularly if the employer is prepared to increase their pension contribution by part or all of their national insurance (NI) contribution saving.

Attractions of salary sacrifice

Contributions paid out of an employee’s after tax pay are less attractive as the employee (and their employer) will have paid NI contributions on the gross income received. This is not the case where the value of the contribution is sacrificed in exchange for their employer paying the equivalent as an employer contribution.

The employee will save the top part of their NI payment, which currently is 3.25%, or 13.25% depending on earnings. The employee pays the higher rate on monthly earnings between (currently) £1,048 and £4,189 and the lower rate over this on the rest of their earnings. So, this can be a significant saving and more for the lower paid than those earning over £4,189 per month. These rates are proposed to drop to 12% and 2% again on 6 November 2022, following the announcements on 23 September, which may feel that it is less good value. However, employees can only benefit from the savings they are making, they won’t be worse off.

In addition to personal savings, employers often pass on some or all of their savings. Employers currently pay 15.05% on all earnings paid above £758 per month. This doesn’t mean that they will pass on this whole amount. Often they give a set amount such as 10% or an amount based on their savings, such as 90% of their saving retaining the rest. The employer rate is also due to drop on 6 November, back to 13.8%, which may impact on the amounts passed on to members.

Whatever the rate and whatever is passed on from an employer, it is still better value than paying directly and, as every little helps, it makes sense to take advantage of this option if available.

(Note that, whilst NI for company directors is slightly different, for example they will generally pay a blended rate of NI taking into account the changes in rates throughout the tax year, the principles around making savings apply equally to directors and other employees.)

Additional benefits

For a taxpayer with income between £100,000 and £125,140, salary sacrifice planning can also be used to reclaim the personal allowance in addition to the income tax and NI savings.

There will be no effective delay in receiving higher or additional rate relief, because the salary is reduced before payment. By contrast if the contribution is paid directly by the employee to a personal pension scheme, higher or additional rate relief will need to be claimed via the employee’s self-assessment tax return. Of course, if the contribution can be paid to an occupational scheme of which the employee is a member, and which deducts member contributions using ‘net pay’, full tax relief will normally be available immediately.

All the usual benefits of pension contributions still apply, such as reducing income for tests such as the high-income child benefit charge. However, there are limits, such as  the salary should not be reduced below minimum wage and the agreement must be in place before the employee actually becomes entitled to the payment, so it isn’t possible to back date salary sacrifice payments.


If available, there isn’t any real downside to salary sacrifice if done correctly. It is important to ensure that when dealing with the paperwork it is a carefully constructed to ensure it qualifies for salary sacrifice but doesn’t impact on other benefits from the employer, such as death in service, bonus calculations and pay rises. Ideally, these should always refer to the pre-sacrifice salary. However, calculations such as mortgage multiples and other things that just consider gross salary could be impacted, because the pay slip will only show the reduced salary, and this would need to be considered before entering the arrangement. 

Tony Wickenden, Financial Planning Week tip: Considerations around tax wrapper choice

The impact of the announced Growth Plan changes on the taxation (and thus potential attraction or otherwise) of UK (onshore) and international (offshore) investment bonds

The Growth Plan (AKA “mini budget”, AKA “Fiscal Event”) fulfilled many expectations in relation to tax change. It also delivered some surprises. The resulting market reaction and the very real and current impact on the currency and potential interest rates and inflation have all been very well documented.

In the context of tax change, this bulletin considers the impact of the announced Growth Plan changes on the taxation (and thus potential attraction or otherwise) of UK (onshore) and international (offshore) bonds.

So, what are the changes that could/will have an impact on decision making about where to place new and potentially existing investments. Tax is by no means the most important in that decision making, but it is a material contributor. A strategy done “tax well” will deliver some Alpha over one done just “well”. A statement of the obvious if ever there was one.

Here are the announced changes to factor into decision making:

The basic rate of tax will fall to 19% on 6 April 2023.

The additional 1.25% on dividend taxation will be removed on 6 April 2023. The dividend additional rate will also be removed. This will apply for dividends received by individuals and trusts. The highest dividend rate will be 32.5% from 6 April 2023.

The proposed abolition of the additional rate of tax (45%) from 6 April 2023 has now been reversed so the additional rate remains for individuals and trustees, for non-dividend income. Note, however, that no announcement has been made about the abolition of the additional dividend tax rate (currently 39.35%), at the time of writing. If that abolition is also reversed (as one would expect it would), the highest dividend tax rate will be 38.1% from 6 April 2023.

No changes to top slicing relief or the 5% withdrawal rules.

No changes to capital taxation (inheritance tax (IHT) and capital gains tax (CGT)) were (or have been) announced.

So, why are these particular changes material? Well….

  1. The rate of taxation charged on gains and income arising inside a UK life fund on policyholder funds is anchored to the basic rate of tax – that’s 19% from 6 April 2023 – not the 19% corporation tax rate, and its set to stay this way. It does not therefore increase, or decrease, aligned to the rate of corporation tax.
  2. With the basic rate falling to 19% from 6 April 2023, the rate of tax payable by higher rate taxpayers on chargeable gains made on UK investment bonds from 2023/24 will effectively be 21% (not the current 20%). The effective rate represents the difference between the higher rate of tax and the basic rate.
  3. A lower basic rate (19%) charge will apply to gains falling within this band made under offshore bonds. Chargeable gains made under UK bonds remain free from basic rate tax of course.
  4. The reversal of the abolition of the additional rate of tax (45%) will mean that the maximum tax rate that can be paid on a gain made under a UK bond will be 26% and 45% under an offshore bond.
  5. The removal of the 1.25 % dividend charge – from 6 April 2023 – will improve slightly the relative position of collective investments. However, it must be remembered that dividends received will not suffer tax at any level inside a UK or offshore bond at life fund level. And with a UK bond, the policyholder will also have a basic rate tax credit to set against any gain.
  6. No changes to top slicing relief or the 5% withdrawal rules (both very long standing by the way) delivers important stability in tax planning with bonds.
  7. No changes to capital taxation – that’s CGT and IHT.

So, what conclusions can we draw from all of this?

  1. The basic principles of wrapper decision making (bonds v collectives and UK bond v offshore bond) haven’t changed, but the “nuancing “(reflected in those rate changes noted above) has.
  2. As for before the changes described above take effect, each case must be decided on its own facts – with the benefit of advice. There are a number of “moving parts” to take into account.

         But, subject to all of the forgoing:

  1. To the extent that an individual can use the CGT exemption and the dividend allowance then there is no obvious tax deferment benefit to enjoy from bond investment.
  2. Once an individual has exceeded the CGT exemption and dividend allowance and especially if they are a higher rate taxpayer and can defer taking gains until they are a basic rate or non-taxpayer, then potentially material tax benefit can be secured by investing in UK or offshore bonds – as appropriate in the circumstances. Keep an eye on respective charges though before making a decision.
  3. The lowering of the basic rate (and thus the UK life fund rate on policyholder funds) will, over time, have a beneficial impact on UK life fund growth to the extent that the growth comes from other than dividend income – all other things being equal.
  4. For investors in offshore bonds, who can minimise other income in the year of encashment, they will be able to secure zero tax on build up and a potentially reduced basic rate tax on gains beyond the personal and savings allowance.
  5. Investors in UK bonds will need to factor into their encashment/withdrawal strategy that post 5 April 2023 bond gains, net of the basic rate credit, will be taxed at 21% (higher rate taxpayers) and 26% (additional rate taxpayers) and not 20% and 25% respectively.
  6. For bonds held over the long term the value of top slicing relief and potentially undrawn/unused 5% withdrawals continues to be really high.
  7. If an individual is looking to use a trust with a financial product, then considering a bond first – given its unique and powerful tax status in relation to tax deferment and potential to make a tax effective encashment – can make sense on tax grounds.
  8. And remember, assignment of a UK or offshore bond to any (adult) individual (from an individual or a trust), is entirely possible (and usually income tax and CGT free) if this fits with your client’s financial plan and will reduce the tax on final encashment by the assignee (transferee).

Simon Martin, Financial Planning Week tip: Corporate investing – creating an income in retirement

An outline of the opportunities that apply to company shareholders.

Many of our financial planning clients who own a SME business, ask the question “what should I do with surplus capital owned by the business?”

For many, the tax efficiency of extracting money via a pension makes this the default recommendation. But what about our clients who are limited in their ability to make a pension contribution due to the annual or lifetime allowance?

Where these clients have surplus capital within the company, and a concern about both low interest rates and higher inflation, investing within the company can make sense. Using an equity-based collective investment allows the gains to be deferred until surrender and the dividends to effectively be paid tax-free to the company as “franked income”.

Over the long term, history shows equity investing gives a great opportunity to achieve returns greater than inflation. Structuring the investment in a tax efficient manner increases the attractiveness even more. As the investments remains owned by the company, the funds can be used for future business purposes where required.

The potential advantages of corporate investing are clear; however, the question remains as to how the money can be extracted from the business in a tax efficient manner.

Planning opportunities – retain the company

One option is to retain the investment within the business after the company has stopped trading and treat the company as an investment company. The shareholders can then draw the dividends during retirement from the now investment company until they are exhausted. This is especially attractive for a company that could not be sold, such as a consultancy company.

Typically, an investment company will not qualify for capital gains tax Business Asset Disposal Relief (BADR) or inheritance tax Business Relief. However, drawing the funds as income means there will never be a capital event and therefore the loss of BADR is inconsequential. In addition, where the capital is drawn and spent during the owner’s lifetime, Business Relief becomes less relevant.

Your client, the owner of the business, and potentially their spouse/civil partner would be able to use the dividend income from the company, once they finished trading, to fund retirement. Each spouse/civil partner could use their £12,570 personal allowance and £2,000 dividend allowance with the remaining income in the basic rate taxed at just 8.75%.

Note that when a company declares a dividend, the proceeds must be split equitably, according to the number of shares each shareholder owns at the time. So, for example, two 50% shareholders, holding the same type of shares, would each receive the same level of dividends. Also, a dividend is a payment a company can make to shareholders if it has made a profit. A company must not pay out more in dividends than its available profits from current and previous financial years. For more information please see Dividend payments by a company.

Assuming each spouse/civil partner took an income up to the basic rate tax threshold, they could extract £100,540 annually (£50,270 each) with a tax rate of just over 6%, lower even than the 10% BADR rate which may have otherwise been available.

Having the additional income can create several opportunities for our clients, including retiring before the State Pension is available or simply providing a greater income during the early retirement years where the client’s expenditure is often higher.

In addition, this allows our clients to leave their tax efficient pension funds invested for longer before drawing down the funds, increasing the value of the inheritance tax efficient assets they hold.

Retaining the company structure also provides the opportunity to gift shares to the next generation as part of an intergenerational plan.


Whilst corporate investing is an important part of an SME financial plan, consideration of exit is equally vital and should be discussed with your client alongside their other professional advisers.