Increasing National Insurance savings by making large pension contributions in minimal months

corey2k

I had an idea a few months ago about a methodology to increase tax savings when making salary sacrifice pension contributions.

In short, due to the way NI is calculated (on a monthly basis with bands 0%, 12% and 2%), we can save by making our pension payments over as few months as possible, rather than spreading them out over 12 months.

Take for example a person earning £65,000 making salary sacrifice pension payments of £12,000.  These payments spread over 12 months would mean tax savings of 42% (40%+2%), however, if the person was to make the pension payments over 3 months (minimum wage for 2 months, slightly more the last), the tax savings would be 48.93%, saving them £831.76 in NI.  It works by making pension payments so large that we start saving in the 12% band.

I wrote a calculator to demonstrate this: https://victorious-island-0a2824003.2.azurestaticapps.net/nationalInsuranceOptimiser/

Has anybody tried this before?  There is a similar theory that applies to people on the 60%/45% tax boundary, where you can reduce average income tax over the years by paying varying amounts into pension

Jeremy535897

Firstly, it does not work for directors, who have an annual pay period for national insurance. Otherwise, you are correct, so long as you receive at least £123 a week. As to the 60%/45% boundary, again you are correct, as it is better to earn £100,000 in year 1 and £150,000 in year 2 than £125,000 in each year. The benefit may be increased further if childcare is relevant.

Pat38493

I was referred to this thread due to a post on the pensions board - interesting calculator - I think I am doing something like this already but more by luck than judgement.  Might give it a whirl.