Salary Sacrifice - how low can you go ?

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  • bluenose1
    bluenose1 Posts: 2,645
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    People can earn the minimum wage and still make pension contributions how does that work then

    I wonder if you can salary sacrifice up to NMW and anything more is tax relief only. Still worth doing even for just the tax relief for me rather than paying off mortgage.
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  • akh43
    akh43 Posts: 1,551
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    I have paid into my work's final salary pension for over 33 years, but the past few years I have contributed to a connected AVC which will offset my tax free lump sum when I receive my pension in 15 months and so give me a bigger monthly pension when I retire. I currently earn £2117, pay just over £190 into final salary pension and then £1000 into AVC's. I pay no tax and pay just under £30 a month NI. With salary sacrifice I still come out with £886 a month due to paying no tax and minimal NI contributions (although £1000 goes into the AVC's I only lose £670). I was advised by work not to increase my AVCs any further in case it takes me out of the NI band.
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  • Triumph13
    Triumph13 Posts: 1,730
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    People can earn the minimum wage and still make pension contributions how does that work then
    Because they aren't doing it by salary sacrifice. In sal sac arrangements you are swapping salary for EMPLOYER'S pension contributions. The employer can't let you sacrifice so much that your remaining salary drops below minimum wage. You can still make employee's pension contributions from your minimum wage salary.
  • bluenose1
    bluenose1 Posts: 2,645
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    akh43 wrote: »
    I have paid into my work's final salary pension for over 33 years, but the past few years I have contributed to a connected AVC which will offset my tax free lump sum when I receive my pension in 15 months and so give me a bigger monthly pension when I retire. I currently earn £2117, pay just over £190 into final salary pension and then £1000 into AVC's. I pay no tax and pay just under £30 a month NI. With salary sacrifice I still come out with £886 a month due to paying no tax and minimal NI contributions (although £1000 goes into the AVC's I only lose £670). I was advised by work not to increase my AVCs any further in case it takes me out of the NI band.

    That’s really helpful. I am hoping when I get my next payslip reflecting my increased contributions mine will be similar. If my calculations are correct I will be paying £34 in NI per year.
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  • Triumph13
    Triumph13 Posts: 1,730
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    bluenose1 wrote: »
    That’s really helpful. I am hoping when I get my next payslip reflecting my increased contributions mine will be similar. If my calculations are correct I will be paying £34 in NI per year.
    Are you in the same position as akh43 ie you will be able to withdraw all your extra pension contributions tax free? If not then you may be losing money by contributing below the personal allowance.
    akh43 is getting 32% relief on most of her AVCs (20% tax plus 12% NI), but on the last few hundred pounds a year it looks like she is only getting 12% relief as her £886 a month translates as roughly £11k pa taxable income vs a PA of £11,500. If she can get it all out tax free by leveraging her DB scheme then that is still 12% profit. If instead she was having to pay tax on her withdrawals then she would lose money on that last bit of contribution. That last £500 pa saves £60 of NI going in, but would be subject to £75 of tax on withdrawal.
  • People can earn the minimum wage and still make pension contributions how does that work then

    They do it out of net pay (i.e. after tax) and get the income tax rebated.

    This discussion is about doing it out of gross pay before it even hits the income tax and national insurance calculations.
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  • akh43
    akh43 Posts: 1,551
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    Triumph13 wrote: »
    Are you in the same position as akh43 ie you will be able to withdraw all your extra pension contributions tax free? If not then you may be losing money by contributing below the personal allowance.
    akh43 is getting 32% relief on most of her AVCs (20% tax plus 12% NI), but on the last few hundred pounds a year it looks like she is only getting 12% relief as her £886 a month translates as roughly £11k pa taxable income vs a PA of £11,500. If she can get it all out tax free by leveraging her DB scheme then that is still 12% profit. If instead she was having to pay tax on her withdrawals then she would lose money on that last bit of contribution. That last £500 pa saves £60 of NI going in, but would be subject to £75 of tax on withdrawal.


    When I increased to £1,000 a month in January I was still paying £1.80 a month in tax, but when the PA increased in April that was when I went out of the tax band. It never occurred to me this may happen. As I will only be paying until Feb 19 I am happy with the 12% saving on the last bit rather than dropping the amount of AVC contribution as last pension quote based on this amount. I will get all this back tax free when I retire, plus any bonuses accrued and the rest of my lump sum due will come from FS pension.
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  • michaels
    michaels Posts: 27,949
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    Triumph13 wrote: »
    Are you in the same position as akh43 ie you will be able to withdraw all your extra pension contributions tax free? If not then you may be losing money by contributing below the personal allowance.
    akh43 is getting 32% relief on most of her AVCs (20% tax plus 12% NI), but on the last few hundred pounds a year it looks like she is only getting 12% relief as her £886 a month translates as roughly £11k pa taxable income vs a PA of £11,500. If she can get it all out tax free by leveraging her DB scheme then that is still 12% profit. If instead she was having to pay tax on her withdrawals then she would lose money on that last bit of contribution. That last £500 pa saves £60 of NI going in, but would be subject to £75 of tax on withdrawal.

    So once you go below the personal allowance, whatever your tax position on drawing your pension, you are better off making additional pension payments from your net salary that get grossed up even though no income tax was paid than making AVCs where you save the NI but don't save tax nor get the grossing up....
    I think....
  • bluenose1
    bluenose1 Posts: 2,645
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    edited 17 November 2017 at 5:10PM
    Triumph13 wrote: »
    Are you in the same position as akh43 ie you will be able to withdraw all your extra pension contributions tax free? If not then you may be losing money by contributing below the personal allowance.
    akh43 is getting 32% relief on most of her AVCs (20% tax plus 12% NI), but on the last few hundred pounds a year it looks like she is only getting 12% relief as her £886 a month translates as roughly £11k pa taxable income vs a PA of £11,500. If she can get it all out tax free by leveraging her DB scheme then that is still 12% profit. If instead she was having to pay tax on her withdrawals then she would lose money on that last bit of contribution. That last £500 pa saves £60 of NI going in, but would be subject to £75 of tax on withdrawal.

    Thanks Triumph13.That is a very good point re only getting the 12% relief. I have exceeded tax free relief on about about 10% of my pension contributions. I have set them up this month to increase from 9% to 74%. (Now realise this could be to high because of loss of tax relief.)
    Depending on how well my pension scheme performs I am thinking of retiring at age 56 or 57. This means I will withdraw the 25% tax free plus live off equivalent of my Personal Allowance for 3 or 4 years. I will probably defer taking my pension until 60.
    My pension plan is still a work in progress and thinking about what you have said an added complication is in addition to a property we rent out we have just bought 2 further properties so my Personal Allowance will decrease. I assume this means I can increase my pension contributions to get maximum tax relief.
    Think I need to revisit my mammoth excel spreadsheet as I will not be able to withdraw as much tax free as I originally thought.
    My husband has a very good police pension so we are confident that an income of £11,500 pa from age 56 -60 will be enough.
    Ha, I may have to retire at 55 to get it all tax free:)
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  • Triumph13
    Triumph13 Posts: 1,730
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    michaels wrote: »
    So once you go below the personal allowance, whatever your tax position on drawing your pension, you are better off making additional pension payments from your net salary that get grossed up even though no income tax was paid than making AVCs where you save the NI but don't save tax nor get the grossing up....
    Not always. The sal sac can still be worth it if a)you will already be using all your PA in retirement; and b) your sal sac allows you to leverage a DB scheme to take all your AVCs as TFLS.
    In this situation sal sac turns £88 of takehome pay into £100 of pension which becomes £100 of TFLS. If they had used a private pension then that same £88 would have become £110 of pension, but that would become only £93.50 on withdrawal once they paid 20% tax on 75% of it.
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