Salary Sacrifice - A no brainer?

HardCoreProgrammer wrote: »

I am doing the same thing: sacrificing just under 40k per year (they only allow a whole number for percentage, so cannot get 40k precisely).

My situation: mortgage paid off, have emergnecy fund and enough money in non tax exempt accounts to break the annual interest limit. By doing this, I am putting away nearly 60k into tax free accounts per year (with the 20k ISA allowance) and reducing the balance in my non tax free accounts.

Part of the salary sacrifice only gets basic rate tax relief, but do not forget the 12% NI too, which no longer needs to be paid. The employer also adds the employers NI which they would have paid, so I get about another 13% on top.

One more point which has not been mentioned yet: the favourable tax treatment may be taken away at some point in future, so I see it as a "last saloon" opportunity.

I am kind of jealous on you all having good salary and can max out the pension and ISA.
I am relatively younger at 35 years old now, my salary just reach higher tax band last year, so I commit to myself to limit my taxable income at £45k level by contributing all bonus and salary above £45k to pension (to escape the fate of 40% higher tax band). But this is only 10% of the 40k allowance only

Kiwi, I assume the salary for your chosen career doesn't max out at £50k since you've reached that by 35. So don't depress yourself by comparing apples and oranges (you vs a 49-year-old).

I only started stuffing my pension in my early thirties, and even then "stuffing" was a relative term - like you, I was just doing it to stay under the higher rate bracket and it was just a few grand. But every time I got a pay rise or a promotion, it all went to the pension. Even when I was on £60k, £70k, £80k... I would have considered the amount to have "got silly" had I actually really stopped to think about it, but I never did. It was only when they bought in the £50k (at the time) annual allowance and I realised I was going to have to reduce my payments and discovered how few people in the country were in that position!

But anyhow, I'm 45 now and got nearly £1m in there, and (as Alan suggests) the adjusted salary was still plenty high enough to have fun along the way so I didn't lose out on anything (except maybe with hindsight I should have taken the cash as salary and bunged it into central London residential property).

So, hypothetically, I could have been you now/you could be me in a decade. OK the stock market will do different things for you than it did for me as it'll be different times, but if you are comfortable living on £45k indefinitely but still prepared to work at building your career even though you don't need to in order to enjoy today, you'll be fine.

I also get 13.8% employers NI in addition to 20+12.

Ballard wrote: »

Once I pick a rate I have to stick with it for a year with a few exceptions such as moving or marriage.

The descriptions may say that but for the pension part of salary sacrifice HMRC removed the restriction a few years ago. My big employer first accepted pension change requests by email at any time then set up an online form for them.It could easily get an extra few thousand Pounds into your pocket instead of taken by HMRC.

The 10% extra gain for you is on the part of pay where the concentrated sacrifice means you're saving basic rate range NI but still saving higher rate income tax. Just how much is within this band depends on your total taxable income and how much of you pay minimum wage is.

My workplace has a 50% limit but they waive that once you satisfy the pension administrator that it won't cause you hardship. It's just to protect employees, not anything rigid.

You're only six years fromm 55 so then pension lock-in isn't so long for most of the money. Allowing for NI and employer contributions the 25% tax free lump sum could well end up being more than half of your own out of pocket pension contribution. Conceivably all of it, depending on the exact mixture of matching, NI and income tax rates involved.

Nothing inherently bad happens when you take some pension money at 55 but the pot inside the pension does then become available to creditors in bankruptcy and the part you take out to all creditors.

If you confine yourself to taking the tax free lump sum and using the small pot rule you can continue to make pension contributions as before. If you take an uncrystallised funds pension lump sum or take any money from a flexi-access drawdown pot you'll trigger the money purchase annual allowance and restrict contributions by anyone into pension pots in your name to £4,000 a year with you paying an income tax charge on amounts above this.

There are many good reasons for taking money at 55. These include:

1. Protecting against the lifetime allowance.
2. Eliminating optional mortgage payments and making pension contributions instead then catching up on the mortgage plan after having received the pension tax and NI benefits on the money.
3. Flexibility to invest in things that are hard, expensive or impossible to do within a pension.
4. Recycling all or part of the pension lump sum into new pension contributions, within the permitted limits for this.

The tax free lump sum on my own pensions is already more than one and a half times my mortgage so I'm already effectively getting a free mortgage payoff. Not yet at the point where salary sacrifice NI savings and saved employer NI contribution will cover it all, and may never get there.