Salary sacrifice pension question

Hi

I've been fortunate enough to land a job that pays £116,600 basic salary and am aware that that would mean me losing £8,300 of personal allowance (£16,600 x 50p in the pound).

This amounts to a 60% tax rate on my income over £100,000: 40% higher rate, plus 40% on every 50p in the pound due to the lost personal allowance.

If I put an extra £16,600 into my pension through salary sacrifice, would that mean I avoid the loss of personal allowance and this penal marginal tax rate on my highest earning?

Thanks for any advice..
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Comments

  • lisyloo
    lisyloo Posts: 29,583
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    I am not sure of the amounts, but if you salary sacrifice then your income goes down, so you'll be taxed as if receiving a lower income.

    As well as not paying income tax on the amount that is sacrificed you will also not pay employees NI (2%).

    Ask your employer what happens to the employers NI that's saved (13.8%). My employer passes this on in full to my pension, my last employer passed on 50% of the 13.8% saving.
  • Chippy99

    You seem pretty accurate except in one regard.

    Loss of the personal allowance is unrelated to you salary. It is something called "adjusted net income" which matters (Google is your friend).

    You could have salary of £116,600 and pay, say, 15% into the company pension scheme so your taxable pay (P60) amount would be £99,110.

    Or you could have taxable pay of £116,600 and pay say £20,000 into a SIPP or personal pension so you are taxed on £116,600 but your adjusted net income is less than £100k so you keep your personal allowance.

    Obviously other income needs to be considered and I'm not recommending any particular option but there are many ways to skin a cat :p
  • Chippy99
    Chippy99 Posts: 100 Forumite
    edited 22 February 2018 at 3:11PM
    Thanks Chaps. Perhaps I should be planning to get my income sub-£80k in case Catweazle gets in!

    But @Dazed, either I am confused by what you mean, or you are mistaken perhaps? The fact is you lose 50p of personal allowance for every £1 you earn over £100,000.

    So loss of personal allowance absolutely IS related to your salary.
  • xylophone
    xylophone Posts: 44,139
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    edited 22 February 2018 at 6:48PM
    http://www.kirkrice.co.uk/blog/personal-allowance-do-i-have-to-lose-it-when-earning-over-100k/

    https://www.ft.com/content/7941c1e6-f03d-11e5-aff5-19b4e253664a

    The writer in the article above (2016 - 2017 tax year) suggested that as for someone on income between £100,000 and £122,000, the personal tax-free allowance was tapered away, (creating an effective marginal rate of 60 per cent), sacrificing salary might be especially beneficial.
  • No you won't lose your allowance if you do that.

    The point Dazed is that it is not technically correct to say it applies on earnings over £100,000 It applies to income over £100,000 after certain deductions have been made. Pension contributions are one of those deductions so you would not need to do it by salary sacrifice to keep your allowance, any pension contributions you pay will come off it.

    The are other things that could reduce it for example trading loses or charity donations.
  • My post seemed pretty clean imho, "adjusted net income" is what matters.
  • Lotak
    Lotak Posts: 96 Forumite
    As Dazed said, its about "Adjusted Net Income" rather than salary.
    So if you earn £116,600 (please god by all of us) and you sacrifice £16,600 through your payroll towards your company pension scheme or payroll giving, OR, you invest in a private pension (or donate to charity) £13,280, then your ANI will be £100,000 and you will lose none of your personal allowance.

    £13,280 = £16,600*80%. You'd also be able to reclaim £3,320 in tax from your self assessment.
    Current Debt (excluding mortgage) - £7,020
    Reducing £450/ month.
  • Chippy99
    Chippy99 Posts: 100 Forumite
    Thanks again chaps. My pension scheme is salary sacrifice; I just needed to decide how much to put in it.
  • Chippy99
    Chippy99 Posts: 100 Forumite
    xylophone wrote: »
    http://www.kirkrice.co.uk/blog/personal-allowance-do-i-have-to-lose-it-when-earning-over-100k/

    https://www.ft.com/content/7941c1e6-f03d-11e5-aff5-19b4e253664a

    The writer in the article above (2016 - 2017 tax year) suggested that as for someone on income between £100,000 and £122,000, the personal tax-free allowance was tapered away, (creating an effective marginal rate of 60 per cent), sacrificing salary might be especially beneficial.


    Precisely my point!
  • Snakey
    Snakey Posts: 1,174 Forumite
    1. Any other income? Watch out for bank interest in particular... people often say it's exempt up to £500, actually it's taxable but at 0%, meaning that if you salsac down to exactly £100k and then receive £500 bank interest, your income is £100,500 and you get a bit of clawback giving you an effective tax rate of 20% on the bank interest. Same thing for non-ISA dividends.

    2. When is your annual pay review? Do you get a bonus? Depending on how flexible your employer is with salary sacrifice arrangements you might be well-advised to give yourself a cushion rather than stopping dead on £100k, just in case you get any extra part-way through the year. Lives under the heading "nice problem to have" but even so, it will irk you no end if you get caught by it.
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