Why channelling your NI cut into your pension may be a smart move

The recent cut in National Insurance (NI) contributions presents millions of UK workers with a golden opportunity to boost their retirement savings.

The drop from 12 per cent to 10 per cent in the main rate of NI contributions means that employees across the UK are seeing a noticeable increase in their pay packets.

With 27 million employees benefiting from this change, the question arises – what is the best way to utilise this extra cash?

Redirecting this monthly gain from the NI cut into a pension could help to build a bigger pot in a tax-efficient manner.

For someone on a £30,000 annual salary, this translates to an extra £348 each year, and for higher earners, up to £754.

While many will understandably use this additional income to cover essential costs, for those who can afford it, this additional income may be best funnelled into retirement savings.

Thanks to the power of compounding interest, even smaller additional payments into a scheme could provide a large boost by the time you retire.

But it gets better, the reduction in NI contributions means a basic-rate taxpayer could see their income rise by up to £62.83 a month.

If this is paid into a pension, it effectively becomes £78.53 monthly due to 20 per cent tax relief on contributions.

While it may be possible to do this via a private pension scheme, such as a SIPP, there may also be a benefit in applying the extra income to a workplace pension scheme.

This is due to the fact many employers match or part-match extra pension contributions, further increasing the amount going into the retirement fund.

This strategic move earlier in life could help to open up the possibility of early retirement for some in the right circumstances.

Looking further ahead, further changes to self-employed NI rules, including the abolition of class 2 NIC will also create new opportunities for these workers.

This change, from 6 April, will accompany an additional cut to self-employed class 4 NICs from nine per cent to eight per cent. Like PAYE employees, this additional income may be best funnelled into additional pension savings thanks to the tax and compound interest benefits.

For those looking for guidance on making the most of this opportunity, our team is ready to provide expert advice tailored to individual financial goals and circumstances.

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Posted in IFA News.