Pre Tax deductions are applied on gross salary figure before the income tax deductions. This is a scheme introduced by Government to make people more responsible about their health, insurance, social security and retirement a person is earning $2000 dollars in a period, the total sum of pre deductions is let us suppose $450, the taxable income left for paying HMRC as payroll tax will be $2000-$450=$1550 and not $2000. In this way government is providing ways to people to think upon their retirement and other pre tax necessities at their own. In other way, by creating self responsible attitude towards retirement and basic life benefits of health, Government is making people ready to rely on their own funds instead of taking government assistance. Thus making the public and Government both at well planned strategy to expect within a certain limit.
Make sure pre tax deductions do not eliminate the income tax payment. It would just be paid after deducting pre tax deductions. The sum paid as per tax deductions may Wight more than the income tax amount. The main difference is that per tax deductions becomes your saving account for future years. The most important pre tax deduction is deductions for managing health care expenses. There are also other saving accounts like retirement saving accounts which will be giving handsome return to employee when added with the employers’ contributions. Programs of flexible spending accounts include childcare, preschool and major health expense deductions. The only limitation exist is that payee need to consume this saving account by the year end otherwise the benefit will need to be surrender.
Dental , vision and long term disability deductions are also part of pre tax deductions. At the other end, taxable income arises when long term disability benefits are consumed.
All pre tax deductions rules will remain same in the future years of persons salary unless change In marital as well as legal status like marriage, divorce ,death .Change in employment status like transfer from permanent to temporary, termination will also change the underlying rules of pre tax deductions. Same will effect in case of Addition or subtraction in numbers of dependents in upcoming years.
You may confuse the pre tax deductions with tax credits. Tax credit is the amount that you have right to collect as tax income, this arises when income tax paid balance is more than the income tax due balance or there may be any tax benefits granted by taxation authorities. Although, pre tax deductions sound as saving accounts but still this is not the tax income. This will be deducted from monthly salary as an expense but tax credit is a debit to your tax liability. A debit to tax liability means next income tax payment will be made by deducting the tax credit amounts.
Pre tax payment reduces the taxable income thus you pay low withholding tax and get a greater paycheck . These pre deductions are saving for your current expenses as well as future years ahead.