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main | UK contractor | UK permanent | NZ solutions | Australian solutions |
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The dilemma The biggest issue for permanent employees is that tax is deducted at source by the employer. In the UK taxes and levies, national insurance (employers and employees) and pay as you earn (PAYE), can add to more than 50% of your salary at the highest rate. So any solution must reduce the tax at source.
The answer - pension funds Most employers in the UK offer generous pension fund allowances (unlike in other countries) to their employees. We are always hearing of examples of employers matching employee contributions on a one for one basis. So what is so great about the pension fund? Three things:
This means that you can build a tax free savings account - which is exactly what the UK government want you to do. The government are incentivising you to save for your future...so they don't have to.
The sky's the limit for savings
The same person then decides to contribute into a pension fund through work contributing 10% of their salary and contracting out of the state second pension. By doing this the person increases their total value by £3,846 in a year. That person then proactively goes to their employer and asks that they can salary sacrifice 15% of their salary. This saves the employer money who agrees to give it to the person. They now increase their value by £5,831 a year.
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Myth number 1: There are no options available to permanent employees to reduce their tax burden and save more money. Myth number 2: Permanent employees get paid less than contractors in the UK |
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| No pension |
Contributes 10% to pension |
Salary sacrifice 15% to pension |
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Base salary |
£50,000 |
£50,000 |
£42,500 |
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Pension contribution |
£5,000 | £7,500 | ||||
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Contracted out |
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£1,796 |
£1,796 |
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Take home before tax |
£50,000 | £45,000 | £42,500 | |||
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Tax |
£15,317 | £13,267 | £12,242 | |||
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Take home pay |
£34,683 |
£31,733 |
£30,258 |
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Total pension funds |
£6,796 |
£10,256 |
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Total value |
£34,683 | £38,529 | £40,514 | |||
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Saving over no pension |
£3,846 | £5,831 | ||||
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Some of you might be thinking - so great I get a pension fund and then what. Well read your handy section on transferring pensions to New Zealand and the benefits of doing so to understand why it is such a great thing... just click here |
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Consider
three examples for the same person in permanent employment in the UK who
is earning £50,000 a year. In the first instance the individual does
not contribute into a pension fund at all just receiving a straight salary
and paying full taxes on it.