Question of the week: Salary Sacrifice

Debt_Free_Chick

If you're a higher rate taxpayer and do salary sacrifice for your own contributions, you wil ALWAYS get tax relief at source at your marginal rate.

If you're a higher rate taxpayer and you pay personal contributions to a trust based plan (i.e. a private, occupational scheme set up by your employer and run by a separate board of trustees), you will ALWAYS get tax relief at source at your marginal rate.

If you're a higher rate taxpayer and you pay personal contributions to a contract based plan (stakeholder, personal pension or SIPP) you will only ever get basic rate tax at source. You then have the claim the extra via self-assessment or claim to HMRC.

HOWEVER .... once you make a claim, you'll find that HMRC adjust your tax code for the following tax year and - effectively - try to give you tax relief at source at your marginal rate i.e. they attempt to give you the higher rate relief via your code, so you actually get it month by month.

HTH

Debt_Free_Chick

Dave_ wrote: »

Word of caution - from personal experience.....
Check the terms of your scheme - I jumped in with both feet as a higher rate tax payer - did not read all the t&cs of my scheme.

Was made redundant just over a year later and discovered that my sacrificed contributions were classed as employer contributions - so limitting my options to get refund etc..

Salary Sacrifice is great - just be aware of how your money is being handled.

It's a fair point and to be clear for others who read this ... when you do salary sacrifice, you do NOT pay contributions to your pension. In effect you restructure your pay.

Let's say you earn £25k and your contributions to your pension are 5%. Your employer pays 10% to your pension.

Before salary sacrifice, you are paid £25k and you pay £1,250 a year to your pension. Your employer pays £2,500 to your pension.

After salary sacrifice, you are paid £23,750 and you pay nothing to your pension. Your employer pays £3,750 to your pension.

It's important - you stop paying and your employer pays more. In return, your salary is reduced by the extra contributions that your employer is paying to your pension.

You swap salary for a higher employer contribution - simples

Middlestitch

dunstonh wrote: »

Doesnt matter if they are classed as personal or employer. With money purchase schemes you dont get the option to get money back. The old 2 year rule applies to defined benefit schemes.

I think you'll find that the refund option still applies to company money purchase schemes. Quote from the website of The Pensions Avisory Service:

Less than two years service
If you leave your employer's occupational pension scheme with less than two years service, you may (subject to the rules of the scheme) be entitled to a refund of your own contributions or the value of your own contributions.


The option to transfer to another pension scheme should also be given if you have completed more than three months service.


A preserved pension is not available if you have less than two years service (unless the rules of your scheme allows it).

dunstonh

I think you'll find that the refund option still applies to company money purchase schemes. Quote from the website of The Pensions Avisory Service:

Less than two years service
If you leave your employer's occupational pension scheme with less than two years service, you may (subject to the rules of the scheme) be entitled to a refund of your own contributions or the value of your own contributions.

I have never come across a COMP that allows it. Its possible they exist. So, I am not going to rule it out. Although most salary sacrifice schemes I have seen use GPPPs and they certainly do not have any ability to refund.

The 2 year rule is far more common on defined benefit schemes.

Middlestitch

I suspect that anyone with less than two years' service in an occupational money purchase scheme will almost certainly be in a CIMP (contracted in money purchase scheme), so the point remains pertinent.

Sorry about the jargon, but this two-year business does matter to some people who might read this.

I wholly agree with the previous post that most people are now offered membership of some sort of personal pension arrangement, so this is a bit of a minority interest!

DavidLaGuardia

[OOPs! The first word in the title should say Higher, but I cannot edit this]

Two addtional points to consider regarding salary sacrifice are that, from 2010, those earning more than £100,000 loses their persoanl allowance at a rate of 50p per £1 over the limit. The result of this is that earnings between £100k and about 113k (by which tiime the personal allowance has been eroded) an addtional 20% burden is created fro each £1 that pushes another 50p into the 40% earnings (the basic rate band is a fixed amount). This creates an effective rate of 60% on these earnings and promotes an even greater reason for salary sacrifice. After tax and 1% NI are deducted 39p net in each £1 is clearly better off being diverted to a pension as £1

The second point is that many individuials who individually negotiate salary sacrifice are frequently key people and are in practice more likely to get some or, if they are lucky, all the cost of the Employers NI (12.8% diverted into their pension) making it even more beneficial. Especially worh considering if your company is a small one and is prepared to adjust the package if it means no extra cost, but it is a good idea to offer your employer something for the hassle and its aids in "selling" the idea to them for your benefit.

Note however that there are measures to prevent those who will breach the level at which higher relief will no longer be granted (150k) from using salary sacrifice to circumvent this rule.

Cymro65

MSE_Martin wrote: »

Q. My employer says it's best if I contribute to my company pension via a salary sacrifice system. What does this mean and will it save me money?

Martin's Answer. Rather than contributing from your after-tax pay, contributions under salary sacrifice come from pre-tax pay, so your official wage is reduced by the amount deposited. Say you earned £30,000 a year and put £3,000 a year of it into your pension, your new official wage would be £27,000, with an additional £3,000 deposited into to your pension pot.

While that money would've been tax free anyway if you'd paid it into your pension direct, this way it's also National Insurance (NI) free as that's only deducted from your new lower wage. This means it's an average 11% saving for basic rate payers and 1% for higher rate payers on the amount deposited.

There's also a bonus for higher rate taxpayers, as normally it'd only be given the basic 20% tax relief and they'd need to claim the further tax relief, this way that's done automatically.

The downsides are, as your official wage is lower, it can harm credit applications like mortgages, and reduce entitlements to salary-related benefits such as death in service. It can also reduce your entitlement to the Second State Pension and could tie you into paying a specified amount for 12 months.

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Given that I'm already making additional contributions to my company pension scheme (money purchase), and am a higher rate tax-payer with tax-relief presumably being made at source, is there therefore any real advantage in my switching to a pension salary sacrifice scheme that my employer is introducing from July when it seems that there are some possible significant disadvantages in accepting what is effectively a reduced salary (e.g. salary-related payments such as redundancy, death in service cover etc)? Doesn't seem worth it for a 1% reduciton in NIC's?

Debt_Free_Chick

Cymro65 wrote: »

Given that I'm already making additional contributions to my company pension scheme (money purchase), and am a higher rate tax-payer with tax-relief presumably being made at source, is there therefore any real advantage in my switching to a pension salary sacrifice scheme that my employer is introducing from July when it seems that there are some possible significant disadvantages in accepting what is effectively a reduced salary (e.g. salary-related payments such as redundancy, death in service cover etc)? Doesn't seem worth it for a 1% reduciton in NIC's?

Are you sure that your employer is using your "new" salary (post sacrifice) to calculate these benefits (redundancy, death-in-service etc)? This would be most unusual as the "pre" sacrifice salary would normally be preserved for the purpose of other salary-related benefits.

You should check this out with them.

Debt_Free_Chick

Middlestitch wrote: »

I suspect that anyone with less than two years' service in an occupational money purchase scheme will almost certainly be in a CIMP (contracted in money purchase scheme), so the point remains pertinent.

Indeed it does and this should be closed off by the employer, if introducing SS. The scheme should either vest immediately (i.e. preserve the value of the pension pot) or offer a transfer to all those with less two years pensionable service. Otherwise, employees will - effectively - contribute via SS and find those contributions are "lost" if they leave with less than two years pensionable (qualifying) service.

jamesd

Cymro65 wrote: »

Given that I'm already making additional contributions to my company pension scheme (money purchase), and am a higher rate tax-payer with tax-relief presumably being made at source

You may presume wrong. Ask your HR department. You have a high chance of discovering that you are expected to make a claim foir higher rate tax relief as part of your tax return. The basic rate relief will automatically go into the pension.

Cymro65 wrote: »

is there therefore any real advantage in my switching to a pension salary sacrifice scheme that my employer is introducing from July when it seems that there are some possible significant disadvantages in accepting what is effectively a reduced salary (e.g. salary-related payments such as redundancy, death in service cover etc)? Doesn't seem worth it for a 1% reduciton in NIC's?

Yes, you get the higher rate tax relief immediately instead of having to wait for a tax refund part way through the next tax year.

Your employer may also split part of the employer NI saving with you. Ask.

If your employer doesn't split their NI benefit then the main advantage is getting the higher rate tax relief invested earlier. That's a benefit in steady or rising markets, a disadvantage in falling markets.

An employer wouldn't normally reduce their own redundancy payouts or death inservice benefits. Usually there's a notional "scheme salary" that is the value of your salary before the sacrifice and which is used in benefit calculations. The state ones may be reduced.