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Salary Sacrifice??

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Holden_2Holden_2 Forumite
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Hi

Does anyone have any information on a method of payment called salary sacrifice? I'm starting a pension and the finance director at work said it is a good way of paying, because the tax/NI contributions are lower. Anyone heard anything about it? Thanks

Ben.
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  • claretmattclaretmatt Forumite
    224 posts
    Currently when you make a pension contribution, you will have already paid National Insurance (NI) contributions. By sacrificing a portion of your salary, you can keep the same take home pay, as you would be paying a contribution to the pension anyway, but increase your pension contributions by the NI savings. In addition your employer will be saving 12.8% employer NI contributions. These savings should also be passed on to you, giving a further increase in your contribution.

    All seems great at this stage, if you have followed.

    By reducing your salary voluntarily you could fall below the national insurance contribution levels for certain state benefits such as Statutory Maternity Pay.

    You should however consider some of the following disadvantages

    • If you are in receipt of child tax credit and/or working tax credit should find out how this will be affected. A lower salary may mean more working tax credit but this would be offset by less child tax credit due to lower childcare costs.
    • Pension -lower earnings may affect state pension benefit due to lower contribution levels.
    • Unemployment benefits, Statutory Sick pay, council tax or housing benefit may all be affected.
    • Affect on borrowing when applying for a loan/Mortgage.

    In essence these schemes are great and should increase the contributions you make by 31%, which is very attractive.

    Let me know if there is anything else you need clarification on
    I am a Chartered Financial Planner

    Anything posted on this forum is for discussion purposes only. It should not be considered financial advice as different people have different needs.
  • holden wrote:
    Hi

    Does anyone have any information on a method of payment called salary sacrifice? I'm starting a pension and the finance director at work said it is a good way of paying, because the tax/NI contributions are lower. Anyone heard anything about it? Thanks

    Ben.

    Here are a few links to write up on the subject

    http://www.amicustheunion.org/Default.aspx?page=2292
    http://www.puntersouthall.com/news/a_day/aday_part2.pdf#search='pension%20Salary%20Sacrifice%20amount'
    http://www.sharingpensions.co.uk/corporate_benefits_salary2.htm

    claretmatt has already listed many of the advantages and possible issues, one other is that if you are in a position to drop your earnings below the 40% tax band, any general savings you may have will now only be taxed at 20% rather than 40%.

    Also I've been trying to get an answer from the different government departments about any maximum amounts they consider a person can sacrifice as there were limits in the past, but currently there does not seem to be any, so you could sacrifice all earning above what is required to cover the mimimun wage requirements.
  • I know a lot of people who use Salary sacrifice to put thier bonuses into their pensions. Bonuses tend to be purely financial (no extra benefits to lose, which are normally only based on Basic salary).

    If the things that can effect the level of salary are not important or do not apply, then its a great way of adding to your pension. But as the previous posts mention - if there are others factors which do effect you and put you at a disadvantage then its not so great - but something to help you to decide - your employer will also save the Employers NIC contribution (12.8%) so perhaps you should ask them to add that or part of it to your pension contribution!
  • Also I've been trying to get an answer from the different government departments about any maximum amounts they consider a person can sacrifice as there were limits in the past, but currently there does not seem to be any, so you could sacrifice all earning above what is required to cover the mimimun wage requirements.

    Essentially this is correct there is no limit to what you can contribute to a pension. However note the following. You can only get tax relief on contributions up to 100% of your taxable earnings - fairly obvious.

    Secondly if your contributions plus any contributions paid by the company to all pensions schemes within the year exceed the Annual Allowance (£215,000 for this year) then you will be liable to a charge of up to 55% on all contributions above the £215,000.

    Note the Annual Allowance does not apply in the year in which you take retirement.

    Thanks

    Jonathon
    I have worked for 5 years as a Pension Administrator and then a further year in a non-administrator pension role. I am not (and never have been) an adviser. Do not take anything I say as advice, it is information given on the best of my knowledge.
  • cjkingcjking Forumite
    95 posts
    Part of the Furniture 10 Posts
    You can only get tax relief on contributions up to 100% of your taxable earnings

    The 100% limit only applies to personal contributions. When you use salary sacrifice, it's the employer that is going to make contributions, and there is no limit on the size of employer contributions. (There is a tax charge if they are more than £215K, but that's probably not an issue for most of us.)

    As someone has already noted, the big saving from salary sacrifice is the 12.8% employers NI the employer no longer has to pay. Ask them how much of that they are going to pass on to you. I would have thought that they should pass on the lot, since it costs them nothing to do so, however my wife's employer used to offer only 1% and in the latest documentation there's no incentive at all.
  • tomelltomell Forumite
    13 posts
    My company is offering its staff this sort of pension payment.
    They will not be putting their savings into the pension fund so will this mean its not worth changing to this system and as it is a final salary scheme can any of the experts tell me if this would reduce our final pensionable monies.

    Thnx
  • cjking wrote:
    As someone has already noted, the big saving from salary sacrifice is the 12.8% employers NI the employer no longer has to pay. Ask them how much of that they are going to pass on to you. I would have thought that they should pass on the lot, since it costs them nothing to do so, however my wife's employer used to offer only 1% and in the latest documentation there's no incentive at all.

    There is still the incentive. Even if the employer keeps the whole lot (and it is for this reason many bother to tell their staff) salary sacrifice still offers the incentive of releif on employee national insurance and the addtional tax relief.

    £100 less basic tax £22 & NI £10 = £68

    £68 into personal pension = £ 87.18 gross (+28.2%)
    or
    Sacrifice salary for pension = £100.00 gross (+48.1%)
    or
    Sacrifice salary with full employer rate given back = £112.80 (+65.9%)
  • Paul_HerringPaul_Herring Forumite
    7.4K posts
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    ✭✭✭✭
    £68 into personal pension = £ 87.18 gross (+28.2%)
    It is generally considered that this particular 'benefit' should be ignored, since the pension will, in all likelyhood, get taxed back down to £68 upon withdrawl. For a basic rate tax payer, who will likely be a basic rate tax payer in retirement, this is simply a tax deferral.

    The other 2 are, however, reasons for doing this.
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  • It is generally considered that this particular 'benefit' should be ignored, since the pension will, in all likelyhood, get taxed back down to £68 upon withdrawl. For a basic rate tax payer, who will likely be a basic rate tax payer in retirement, this is simply a tax deferral.

    The other 2 are, however, reasons for doing this.


    Basic Rate tax payer gets 25% tax free cash.
    Assuming this is invested for income in the most tax efficient maner (ISAs, CGT cyrtallisation etc etc), then a basic rate tax payer is still ahead.
    Gross up £68 to £87.18

    (0.75 x £87.18 taxed at 22%)+(0.25 X 87.18) = £72.80 so they get an extra 7.1%. more modest but still a gain.

    They get more for what falls in the lower rate and are at a loss if it exceeds the limit for age allowance (currently £20,100) as the marginal rate is 33% tax.
  • KiNeLKiNeL Forumite
    36 posts
    Generally SS is good idea, even better if the employer contributes the NI savings.

    There are a couple of downsides though which may or may not be of concern to you.

    It's a one way deal, once it's sacrificed it's gone for good, you can't change your mind and get it back in your pay packet.

    Also it can affect your borrowing ability because your salary is now lower than it was.
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