Niche queries on pension contributions

scarletjim · 20 April 2017 at 8:53PM

I’ll be impressed if anyone can help with these two, as I’ve spent several hours with Google trying to work out the answers…

1. If you use a salary sacrifice scheme at work to make gross contributions as ‘pension top up’ or similar, would you increase the NI saving by making very large contributions (maybe most of your pay) in a few months instead of smaller contributions over many months? I ask because of course NI is calculated on a weekly/monthly basis, not annually like income tax, and the higher threshold rate for NI is only 2%, compared to 12% at the lower level. So if you were going to contribute an extra say £10k in a year, would you be better off doing it as £5k x 2 months, compared to £2k x 5 months? Or would it make no difference (for some reason that I can’t fathom)? (By the way, I’m assuming that with income tax being ultimately calculated annually, the impact on that would be exactly the same by the end of the year – though I’m not sure whether the company payroll could process it appropriately to achieve that, I guess I might have to reclaim some tax through self-assessment later maybe…).

2. Can ‘shareplan’ proceeds that are managed via PAYE be counted as earnings for pension contributions purposes? And if so, would they attract Higher Rate Tax relief for pension contributions (for an HRTpayer obviously)? I have a workplace ‘Shareplan’ scheme operated via the Head Office in another country, so it cannot make use of UK tax reliefs for such schemes, and hence on disposal of shares after 5 years, any gain is paid and taxed via PAYE. So say you have a shareplan disposal with a £10k gain that is taxed at 40% via PAYE, can you include that £10k amount in the amount up to which you can get HRT relief when making a pension contribution, and therefore get £4k tax relief on it? Or is it somehow not ‘relevant’ because, despite being PAYE, it has not actually been ‘earned’ through work? (Though that is arguable – only employees get it, so it is sort of payment for our work…)

By the way / for context, I’ve (foolishly) never looked into this before, so have made no additional contributions to any pension scheme in the last 3 years other than my annual bonus, and now I’m regretting that and would like to move as much as possible of my HRT earnings from the last 3 years into my pension in order to effectively supplement them with the 40% tax relief available. I’m aware that this would need me to spare quite a lot of capital over the next 3 years, but with my mortgage interest rate being so ridiculously low right now, and having some other capital available and really achieving nothing, I’d like to see what would be possible for my pension and then calculate what I can actually achieve. I’m aware of the £40k annual limit, and the 3-year carry forward rules relating to it, and I’m aware that you can only contribute up to the amount that you have actually earned in that year (i.e. if using carry forward, you still can’t exceed your earnings in the current year). So I think it’s just the little nuances above that I’m stuck on now…

Any answers to my questions, or any other relevant thoughts, considerations, or even warnings, would be greatly appreciated.

Wednesday100 · 20 April 2017 at 10:08PM

I too would be interested in the answer to 1) for the same reasons as you. I think I did see a post on this forum saying that maxing out contributions over a few months was the best approach for the reasons you give.

This might be of interest to you on the salary sacrifice. My employer will not let me salary sacrifice any amount that takes my salary below minimum wage. So monthly £5,000 contributions may or may not be possible depending on what your normal salary is.

Triumph13 · 20 April 2017 at 10:37PM

You can indeed save on NI by having a few months at minimum wage and a few at the minimum pension contribution to get max employer conts.
I'm afraid I don't know about the SAYE scheme
You also talk about using up 40% relief from previous years. This is NOT possible. All carry forward allows you to do is contribute more than £40k of your CURRENT income. You only get 40% relief on that part of current income that's above the HRT threshold.

greatkingrat · 20 April 2017 at 10:39PM

Yes, for people who normally earn above the Upper Earnings Limit, you can save NI by making a lump sum pension payment rather than regular small payments.

For example: Gross Pay £4000, Pension £200, NI due on £3800 is £369.40 per month (£4432.80 for the year)

If you make one lump sum payment of £2400, then in April you will pay £237.36 on £1600, and in the other 11 months you will pay £373.40 on £4000. This comes to £4344.76 for the year, a saving of £88.04.

However you need to make sure you don't take your pay below the Earnings Threshold (£676 per month) otherwise you will become worse off again.

Shouldn't make any difference to your tax either way.

zagfles · 20 April 2017 at 10:56PM

scarletjim wrote: »

I’ll be impressed if anyone can help with these two, as I’ve spent several hours with Google trying to work out the answers…

1. If you use a salary sacrifice scheme at work to make gross contributions as ‘pension top up’ or similar, would you increase the NI saving by making very large contributions (maybe most of your pay) in a few months instead of smaller contributions over many months? I ask because of course NI is calculated on a weekly/monthly basis, not annually like income tax, and the higher threshold rate for NI is only 2%, compared to 12% at the lower level. So if you were going to contribute an extra say £10k in a year, would you be better off doing it as £5k x 2 months, compared to £2k x 5 months? Or would it make no difference (for some reason that I can’t fathom)? (By the way, I’m assuming that with income tax being ultimately calculated annually, the impact on that would be exactly the same by the end of the year – though I’m not sure whether the company payroll could process it appropriately to achieve that, I guess I might have to reclaim some tax through self-assessment later maybe…).

Yes. Been discussed here a few times. NI works on a pay period basis and tax on an annual basis so you can get 52% relief on part of your pension contribution doing as you describe. Note that you can't sal sac below national minimum wage.

2. Can ‘shareplan’ proceeds that are managed via PAYE be counted as earnings for pension contributions purposes? And if so, would they attract Higher Rate Tax relief for pension contributions (for an HRTpayer obviously)? I have a workplace ‘Shareplan’ scheme operated via the Head Office in another country, so it cannot make use of UK tax reliefs for such schemes, and hence on disposal of shares after 5 years, any gain is paid and taxed via PAYE. So say you have a shareplan disposal with a £10k gain that is taxed at 40% via PAYE, can you include that £10k amount in the amount up to which you can get HRT relief when making a pension contribution, and therefore get £4k tax relief on it? Or is it somehow not ‘relevant’ because, despite being PAYE, it has not actually been ‘earned’ through work? (Though that is arguable – only employees get it, so it is sort of payment for our work…)

Don't know whether it's 'relevant' earnings or not but that doesn't matter unless you intend contributing over 100% of your actual relevant earnings.

For instance if your earnings are £55k plus £10k from this shareplan taxed through PAYE, so your total PAYE earnings are £65k, then you can contribute £20k (gross) to a pension and get higher rate relief on the lot.

You only need to know if it's 'relevant' earnings if you want to contribute over £55k to your pension.

By the way / for context, I’ve (foolishly) never looked into this before, so have made no additional contributions to any pension scheme in the last 3 years other than my annual bonus, and now I’m regretting that and would like to move as much as possible of my HRT earnings from the last 3 years into my pension in order to effectively supplement them with the 40% tax relief available.

Not sure if I'm reading this right but you can't get tax relief for previous years, you only get tax relief for the year you contribute. So if you're £20k over the higher rate threshold this year, you can only get higher rate relief on £20k of contributions. The fact you paid higher rate tax in previous years is irrelavent.

jamesd · 21 April 2017 at 4:13AM

The share plan is a taxable pay and you will be taxed and pay NI on it just like your other pay. So yes, you'd pay 40% income tax on it and 12% or 2% NI and get the 40% relief and 12% or 2% saving just as for other pay.

Your employer will also save their 13.8% employer NI on it and may deduct that from the amount they pay you unless you sacrifice it. Even then they might not restore the whole of the NI they save. Something to ask them about. It's quite often possible to have variable pay put into a pension like this. That is, you should clarify whether for a £10,000 gain they will pay by sacrifice £10,000 into the pension or £10,000 minus 13.8% or something else.

scarletjim wrote: »

I’m aware that you can only contribute up to the amount that you have actually earned in that year (i.e. if using carry forward, you still can’t exceed your earnings in the current year).

That's right. You can't pay in to sacrifice down from say £99k to lower than £59k using the current year annual allowance but you can get all the way down to £45k and save higher rate on the extra £14k if you have the extra £14k of carry forward allowance available.

Since you're getting relief on this year's income tax once you go below £45k the pay alone won't save you 40% income tax but instead you'll start to save 12% instead of 2% NI.

However, if you have £10k of non-work or other job income, you can get 40% income tax relief and 12% NI saving by going down to £35k. In this situation the full 40% doesn't end up in the pension, just the 20% that the job knows about. But HMRC knows about the other £10k of income and will give you the relief on that part: 20% in the pension and HMRC will charge you only that 20%.

scarletjim wrote: »

would like to move as much as possible of my HRT earnings from the last 3 years into my pension in order to effectively supplement them with the 40% tax relief available

That works so long as you're paying 40% on enough income in the current year, the one in which you're making the pension contributions. If you were thinking that you could get £40k more with higher rate relief on the £99k you paid higher rate on in 2016-17 by sacrificing £80k from £99k to £19k in this year, you can't, unless you have that other job or non-work income in 2017-18 to take you up to £125k total taxable income this tax year. That's £45k plus the whole £80k needed as income in this tax year to get 40% on all £80k

scarletjim · 21 April 2017 at 11:19AM

Wow, I wondered if I'd posed the question in too complicated a manner, but I'm amazed by the clarity of the answers provided, extremely helpful, so great thanks to you all.

On a somewhat different note, two very different, more conceptual questions that my GF asked me this morning:

1. 'Are you comfortable putting so much into your work pension scheme? What if they lost all the money?'
How likely is that for a huge multi-national company with over 100 billion annual revenues? If I became uncomfortable, can a work defined contribution scheme be transferred out in separate parts, to spread the risk over several different providers?

2. 'Are you confident that your government (she's Polish btw) won't use your pension fund as an excuse in 20 years to not pay you any state pension, in which case your tax relief savings etc will all have been effectively for nothing?' I'm pretty sure no one can have a definitive answer to that one, I guess maybe the answer is perhaps that a bird in the hand is worth two in the bush...

jamesperrett · 21 April 2017 at 1:30PM

scarletjim wrote: »

'Are you confident that your government (she's Polish btw) won't use your pension fund as an excuse in 20 years to not pay you any state pension, in which case your tax relief savings etc will all have been effectively for nothing?'

Up until last year we had contracting out which was a similar sort of thing - if you had your own pension you could pay reduced National Insurance in return for a lower state pension. Having scrapped such a scheme recently, would they want to re-introduce something similar in years to come?

Political parties are also very aware that pensioners are more likely to vote than younger people so it is in their interest to keep the pensioners happy.

LHW99 · 21 April 2017 at 1:35PM

IMO
1) if a large company went down, the pension scheme would either be taken over by a successor company, or would go into the PPF. So things would change, but there wouldn't be a total loss.
2) No one can predict what future governments will do, but legislation doesn't tend to be retrospective, and in any case you would at least be sure you had your own provision, whatever happened, if you have built up your own fund.

zagfles · 21 April 2017 at 6:29PM

scarletjim wrote: »

Wow, I wondered if I'd posed the question in too complicated a manner, but I'm amazed by the clarity of the answers provided, extremely helpful, so great thanks to you all.

On a somewhat different note, two very different, more conceptual questions that my GF asked me this morning:

1. 'Are you comfortable putting so much into your work pension scheme? What if they lost all the money?'
How likely is that for a huge multi-national company with over 100 billion annual revenues? If I became uncomfortable, can a work defined contribution scheme be transferred out in separate parts, to spread the risk over several different providers?

A DC scheme would tend to be looked after by one of the big providers who will hold the investments on the client's behalf and won't beneficially own them, so if they went bust the pension investments would be safe from creditors.

2. 'Are you confident that your government (she's Polish btw) won't use your pension fund as an excuse in 20 years to not pay you any state pension, in which case your tax relief savings etc will all have been effectively for nothing?' I'm pretty sure no one can have a definitive answer to that one, I guess maybe the answer is perhaps that a bird in the hand is worth two in the bush...

The govt could od anything, but IMO there's virtually no chance of the state pension being means tested in the near, or even the far future. State pension policy has been going the other way - less means testing not more. For younger people it would completely destroy the incentives to save for anyone on a low-mid income, and for older people it would be political suicide as pensioners are very good voters.

Niche queries on pension contributions

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