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Save More And Reduce Tax (SMART).
How does it work?
SMART is a way of paying pension contributions that will increase the amount paid into the employee’s pension without reducing their take home pay.
A simple summary:
- The employee gives up the amount of salary necessary to achieve the same net income, as they would have received had they made the pension contribution of their choice to the company’s registered pension scheme.
- This amount is then paid into the employee’s pension as an employer contribution.
- Employee and employer pay less National Insurance and the employee pays less income tax.
- The income tax and National Insurance that the employee saves and any National Insurance saving that the employer is willing to pass on is also paid into the employee’s pension as an employer contribution.
As a result:
- The employee’s take home pay will remain the same.
- The total amount contributed to their pension will increase.
Examples
The example assumes an employee contribution of 5% basic pay and the employer will match this at 5%, in addition the employer will pass on 50% of their National Insurance saving to the SMART contribution.
| Pay | £ | Deductions | £ | Take home pay |
|---|---|---|---|---|
| Basic pay (before deductions) | 20,000 | |||
| Income tax | 2,379.00 | |||
| National Insurance | 1,487.40 | |||
| Pension contribution 5%(net of basic rate tax) | 800.00 | |||
| 20,000 | Total deductions | 4,666.40 | 15,333.60 |
| Employee contribution (5% net of basic rate tax) | £800.00 |
| Rebate of basic rate tax on employee contribution | £200.00 |
| Employer contribution (5%) | £1,000.00 |
| Total annual contribution | £2,000.00 |
| Pay | £ | Deductions | £ | Take home pay |
|---|---|---|---|---|
| Basic pay (before deductions) | 20,000 | |||
| Pension contribution 5% + employee tax and NI saving | 1,176.47 | |||
| Income tax | 2,143.71 | |||
| National Insurance | 1,346.22 | |||
| Basic Pay | 18,823.53 | Total deductions | 3,489.93 | £15,333.60 |
| Employee’s sacrificed salary (5% of basic pay) | £1,000.00 |
| Employee NI saving and related tax saving | £176.47 |
| 50% of employer NI saving | £81.18 |
| Employer contribution (5%) | £1,000.00 |
| Total annual contribution | £2,257.65 |
In this example the amount of the employee contribution has increased by £257.65 at no cost to the employee. In addition the employer has saved 50% of the National Insurance that they would have paid on the pre-SMART salary (£81.18).
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