Alternatively, you can personally invest in a pension, but you are limited to an investment of up to 100% of the salary. For tax reasons, you may have chosen to keep your salary low, which can be a significant limiting factor, which is why many entrepreneurs prefer a business contribution instead. Salary sacrifices are a great way to increase the amount you put into your retirement pot – saving money effectively for your retirement. Read on to find out the benefits of using wage sacrifices and whether they are available to employees of the umbrella company. No matter how you set up your contract work, it`s important to be aware of your insurance obligations. As a PAYG, you do not have to pay for your own insurance (e.B. WorkCover, Liability), while Pty Ltd contractors must cover all their own insurance policies. Both types of entrepreneurs should consider whether income protection insurance is right for their needs. Only if that income exceeds £200,000 should you consider your “adjusted income”, which is essentially your basic income plus your salary sacrifice pension contributions. The risks and disadvantages associated with a wage sacrifice system include lack of accessibility, fluctuations in savings and a possible reduction in employer contributions. While these are the main drawbacks of wage sacrifice agreements, there are other risks as well. The main advantage of wage sacrifices is that they reduce your pre-tax income and therefore the amount of tax you have to pay. For example, if you have an income of $100,000, you can agree to receive only $75,000 in exchange for a $25,000 car as a benefit.
This arrangement is particularly popular with entrepreneurs who operate through a holding company because the “employer” should be able to invest your contract income directly into their pension plan before it becomes taxable. You can invest almost all of your contract income and avoid both income tax and all Social Security deductions by using a so-called wage sacrifice or wage exchange agreement. Wage sacrifices aren`t for everyone, and there are a few things to keep in mind when determining if it would benefit you. An employee may be able to perform better than an independent contractor. . An employee probably won`t have many costs beyond travel, work attire, and other labor costs. However, independent contractors often have office costs and personnel costs. The benefits of a wage sacrifice system can often outweigh the disadvantages, especially considering how much better off you might be when you start receiving your retirement.
However, wage sacrifices aren`t always beneficial for everyone, as your monthly salary commitment decreases, and you may not know if the pros outweigh the cons. As can be clearly seen in the examples above, paying pension contributions by wage sacrifice can increase your income extraction. However, the fact that there is a victim of cash income should not be overlooked. Since this is a commitment that lasts at least a year, you need to make sure that the contributions you agree on are affordable and that their reduced salary will not impact other financial matters, such as. B mortgage applications, life insurance, income protection, etc. However, where it gets really exciting for umbrella entrepreneurs is the idea that all savings benefit you. Your employment quota pays for your job. So the NI savings for employers and employees really depend on you. The same applies to the apprentice tax. Wage sacrifices can significantly reduce the cost of hiring someone, and when you`re self-employed (so to speak), the benefits are clear. Suddenly, the 20% drop in takeaway at FCSA Umbrella Companies can be mitigated if you`re willing to think about your future income/can afford to do so. We`ve done some numbers for ourselves, I`m now getting to a point where a daily rate of £500 is a lot more money than I need to make a living from it.
I`m happy to sacrifice salary in a pension while now taking less (with the above benefits of paying less to the government for fun). On my daily rate, if I do not sacrifice a salary and do not take care of one of the 3 big umbrellas, I will be very happy to take home 57% of my task. .