Using Salary Sacrifice

penwise · 11 May 2017 at 4:04PM

My friend has just been moved on to salary sacrifice .

Her age is @50 and she wants to retire at 60.
She should have full state pension at 67.
Her Morg is @70,000 (@2.1%) with her savings offsetting this full amount rate - (she could use this for salary sacrifice if worth while)
She has policies due to come in in 2019 for @30000 and 2023 for@27000
She has bought some work benefits via salary sacrifice (most of these are subject to income tax some not)
Her salary is @47000 and she currently contributes 12% to her pension and her employee contributes 9%.

She gets paid monthly

The way this salary sacrifice scheme will work is that contributions to the pension scheme will stay constant but her salary in hand will increase. The employer does not contribute any of his NI savings to this.

Salary percentage sacrificed can be changed and starts the first of the month after receiving request.

So my questions is - how can she make the best use of this salary sacrifice scheme?

Some suggestions were:

Putting in as much as possible but not slipping below living wage – which makes sense as the more that goes in at 12% NI saving the better.

Make uneven contributions over year to save on NI - Some figures and percentages were given in relation to this but could some one do a worked example of this over a year showing how the NI is calculated if paid evenly and then unevenly so I can understand where these figures came from?
(I have tried but as my figures are coming out the same for the 12 month period I have not fully understood this - and my head now hurts!)

Any thoughts or recommendations would be welcome

Thanks

ischofie1 · 11 May 2017 at 8:40PM

It makes great sense to sal sac as much as possible, even down to NMW.
The 12% she currently pays takes her in to the 20% tax bracket so considering this, the figures work out as follows:-
For every extra £1 she sal sacs she only loses 68 pence of net pay because she saves 20% tax + 12% NI.
This loss of 68 pence equates to a 47% gain when uplifted to a £1 in the pension. There will eventually be tax to pay on this £1 and assuming its drawn out at the 20% rate this equated to 15% when you consider the 25% TFLS.
So effectively 68 pence up to being drawn out at 85 pence is a gain of 25%.

This is why it makes sense to sal sac as much as possible and use savings to to supplement her day to day living.

Just a few caviets:-
Any extra money put in the pension will not be accessible until 55 so she must be sure she won't need it before then.
If she has any major expense at retirement (mortgage pay off), she must make sure the TFLS will cover this as any major draw out above this in a single year may push it in the 40% bracket.

I can't see the sense in constantly changing the sal sac as you suggest.
Just sal sac to a low level to exhaust the savings to an amount that is comfortable, then alter the amount when this is reached.

Regards

MoneySavingUser · 11 May 2017 at 8:58PM

penwise wrote: »

Make uneven contributions over year to save on NI - Some figures and percentages were given in relation to this but could some one do a worked example of this over a year showing how the NI is calculated if paid evenly and then unevenly so I can understand where these figures came from?

I think the scenario here is where someone is a 40% taxpayer (so effectively paying 2% NIC) but can only sacrifice enough to save at 2% NICs, so if instead of salary sacrificing every month they could salary sacrifice all the way down to NMW in one month and then save NICs at 12%

To compare:
a) calculate the take home pay and pension conts if salary sacrifice is done monthly at x% (maybe 5);
b) calculate 12 months no salary sacrifice, and then 1 month salary sacrificing right down to NMW

There are lots of different scenarios and possibilities but it may be too much hassle and not all employers will allow you to opt in and out of salary sacrifice at will (some specify a 12 month limit).

kidmugsy · 11 May 2017 at 9:08PM

MoneySavingUser wrote: »

I think the scenario here is where someone is a 40% taxpayer (so effectively paying 2% NIC) but can only sacrifice enough to save at 2% NICs, so if instead of salary sacrificing every month they could salary sacrifice all the way down to NMW in one month and then save NICs at 12%

What an excellent idea.

penwise · 12 May 2017 at 4:52PM

Thanks - that helped - I will redo the calculations.

She buys work benefits using salary sacrifice (SS) some of these are subject to tax some are not.( The ones subject to tax are sorted later through a tax code change.)

I know that the cost of the benefits here will reduce the maximum SS contribution she can make to her pension but I am less sure of the affect these benefits will have on the income tax relief for her pension contribution.

For example, 2017/2018 salary £47,000 and benefits bought £ 3,000 ( £2,000 of which is subject to income tax and £1,000 is not). How much income tax relief for a total £12,000 (gross) pension contribution made through SS for year 2017/2018

Thanks

michaels · 12 May 2017 at 5:04PM

Is she able to amend the amount every month - I thought revenue rules were that salary sacrifice should be a 'permanent' arrangement - i.e. lasting at least a year.

Another suggestion if she has the savings is to Sal Sac down to NMW and then make additional pension contributions up to her total income as these still qualify for the 25% basic rate uplift even though with the personal allowance they will mostly have been received tax free. Additionally the resulting very low income may qualify her for tax credits which are based on salary post any pension contributions and if she can demonstrate only very small savings also council tax rebate, housing benefit/smi etc

zagfles · 12 May 2017 at 5:35PM

michaels wrote: »

Is she able to amend the amount every month - I thought revenue rules were that salary sacrifice should be a 'permanent' arrangement - i.e. lasting at least a year.

Sal sac for pensions can now change monthly - rules amended to cope with auto enrolement. However that doesn't mean all employers have to offer monthly changes - some still only allow annual changes.

Another suggestion if she has the savings is to Sal Sac down to NMW and then make additional pension contributions up to her total income as these still qualify for the 25% basic rate uplift even though with the personal allowance they will mostly have been received tax free. Additionally the resulting very low income may qualify her for tax credits which are based on salary post any pension contributions and if she can demonstrate only very small savings also council tax rebate, housing benefit/smi etc

Pension conts are only 50% deductible for HB I believe. SMI not available if you work over 16 hours. Council tax tends to use the same rules as HB. Pension conts are 100% deductible for tax credits and UC, though watch out for capital rules and notional capital/income.

jamesd · 12 May 2017 at 8:27PM

Her pay slip will have her taxable pay reduced from the £47,000 to £35,000 rate. When told about the taxable benefit in kind HMRC will adjust the tax code used to take the basic rate tax due on the £2,000 of taxable benefit.

Basic rate income tax ends at [STRIKE]£46,000[/STRIKE] £45,000 so the amount taxed at higher rate will be reduced by [STRIKE]£3,000 (49-46)[/STRIKE] £4,000 (49-45) and the remaining [STRIKE]£9,000[/STRIKE] £8,000 will save basic rate tax.

In addition there will be NI savings that are greatest if the sacrifice is done over the smallest possible number of months, so most of it saves basic rate range NI. This happens because income tax is calculated annually but NI is done independently for each pay period.

penwise · 13 May 2017 at 11:52PM

jamesd wrote: »

Basic rate income tax ends at £46,000 so the amount taxed at higher rate will be reduced by £3,000 (49-46) and the remaining £9,000 will save basic rate tax.
.

Thanks for the reply.

I wasn't sure what the above sentence meant, I thought basic rate income tax ended at £45000 and I wasn't sure where the 3000(49-46) came from?
if no benefits had been bought I had thought that of the £12000 contribution £2000 of it would have saved higher rate tax and £10000 lower rate tax and I didn't know what impact the beniefits would have on this.
Thanks

jamesd · 14 May 2017 at 5:52PM

The 45/46 was a mistake in my post. Taxable benefits just add their taxable value to the income used for tax calculations.

Dazed_and_confused · 14 May 2017 at 6:45PM

I wasn't sure what the above sentence meant, I thought basic rate income tax ended at £45000

It doesnt in sunny Scotland!

Using Salary Sacrifice

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