Salary Sacrifice??

PeeBee09

I only work 22.5 hrs a week on a fairly low hourly rate so is it worth me opting into SS? I'm worried that it may affect my state pension if ever I get to that stage, I am 52. The projection for me is that I will be £1 a week better off but I don't want to be hit with a request to top up the state pension at a later date, if my contributions aren't enough. :rolleyes:

marklv

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.

You lower your salary and benefit and put the difference in your pension pot. Unlike with normal pension contributions you also get relief on NI contributions. That's the main benefit. It's a good scheme and I would recommend it, but you have to consider that lower NI contributions can impact on your SERPS/Second State Pension.

Dick_here

Can I just add my positive experience.

I was already doing ss and paying 4.75% into the company scheme. I upped that to 6.75% (from 65ths to 60ths btw), which has cost me £52pm. However, the reduced tax and NI has seen my net pay go down by only £27 (increased personal allowance this month too, admittedly). Still, more going into my pension and less tax paid to fund every other scrounger suits me !

Well done ss !

the_bandit

Salary sacrifice is a short term gain with a medium to long term loss.

The bottom line here is salary sacrifice results in lower payments of NI to the UK Treasury by both the employee and the employer.

NI Contributions go towards paying for the NHS and the State Pension. I don't recall either of these being in the fortunate position of a cash surplus so the shortfall is going to have to be met somehow.

And guess what? Higher taxes for you an me!!

So the company gets away with lower contributions whilst we fund the gap!!

Paul_Herring

the_bandit wrote:

Salary sacrifice is a short term gain with a medium to long term loss.

For whom?

The employee gets the gross sacrifice along (hopefully) with any NI not paid as a result.

So the NI is going towards a pension for the employee. I see no long term loss here, and it's certainly no short term gain for the employee.

And guess what? Higher taxes for you an me!!

Looking at this selfishly, by the time that person is claiming their state and private pension, you probably will be as well.

So the company gets away with lower contributions whilst we fund the gap!!

Salary sacrifice done right has no impact (positive or negative) on how much the company has to pay - they're just paying it to the employee instead of the government.

Incidentally, you do realise that while paying NI today gives you state pension entitlement, your NI paid in today does not fund your your state pension tomorrow?

jonnyb1978

My company offerered the salary sacrifice 'Smart Scheme' a while ago but was quickly shot down by us employees as they tried to introduce very sneakily and we were all very sceptic. They also did not have any plans of reinvesting any savings, both employee or employers. What it meant for us was that we would have an extra £1.50 or so in our take home a week. For them a nice £100,000 saving a year.
The scheme is still on the companies agenda and im waiting for it to raise its head again. This time i will have a bit more knowledge.
I would like some things clearing up. I know all about the pros and cons with salary changing etc but would like a clear view of the actual pay and savings.

For Example purposes i earn £20000 a year and pay £25 a week into my company pension. (£1300 a year as we are paid every 4 weekly). Am i right in saying that my new salary will be reduced to £18700. The company will be contributing my £25 along with their contributions to my pension. Now the tricky bit im not sure on. Will i simply save the 11% of £25.00 that would of been for National Insurance. So i will be saving £2.75 a week.
If this is added onto wages through wage slip then this £2.75 will also be taxed along with the rest of my wages bring the total saving to around £2.00.
Am i right so far?
This is the main reason it was not to popular as nobody could be bothered to change their terms and conditions for an extra £2.00.

If the company reinvested this in our pension (providing no other outgoings from wages) then am i safe to assume that my take home pay will be exactly the same as before but with an extra £2.75 a week going into pension as its tax free.
How would this fair with the companies contributions as they pay 1.5 times my contributions. Would they have to do this aswell taking into account the additional £2.75 or would this be classed as seperate. If they did this im assuming the total for all employees would exceed thier total savings.

Can someone please clarify my thoughts or advise if im calculating this wrong.
Thanks

Debt_Free_Chick

jonnyb1978 wrote: »

For Example purposes i earn £20000 a year and pay £25 a week into my company pension. (£1300 a year as we are paid every 4 weekly). Am i right in saying that my new salary will be reduced to £18700. The company will be contributing my £25 along with their contributions to my pension. Now the tricky bit im not sure on. Will i simply save the 11% of £25.00 that would of been for National Insurance. So i will be saving £2.75 a week.
If this is added onto wages through wage slip then this £2.75 will also be taxed along with the rest of my wages bring the total saving to around £2.00.
Am i right so far?

No. Sorry, but you are completely off track.

You are saving £2.75 by not paying it - not by getting it added on. In simple terms.....

On the old basis, you paid tax and NIC on £20,000 p.a.

On the SS basis, you pay tax and NIC on £18,700 p.a.

This is the main reason it was not to popular as nobody could be bothered to change their terms and conditions for an extra £2.00.

Personally, I'd rather have it in my pocket than the Chancellor's coffers. They'll only spend it on a duck-house, moat or a non-existent second home they've given to their kids

If the company reinvested this in our pension (providing no other outgoings from wages) then am i safe to assume that my take home pay will be exactly the same as before but with an extra £2.75 a week going into pension as its tax free.

Yes

But you can always contribute that extra amount yourself anyway. I think you're asking the company to reinvest its own NIC saving .... yes? Bear in mind all the fees that the company will have to pay to get this up and running .... legal advice, tax advice, communications (e.g. printed material to explain the change, team briefings), systems changes e.g. to payroll and HR processes.

As an HR (Pensions) Manager, I wouldn't attempt this without a budget of at least £40k!

In the current financial climate, putting in SS could save jobs!

What's wrong with the company's proposal? Pay your pension contributions by salary sacrifice - you save (and get to keep what you save) and we save (and get to keep what we save)????

jonnyb1978

Thanks. I do now think its a good idea but this was a while ago and the company were very vague on the effects i.e state pension, tax credits etc. Im just trying to get a clear incite as when this comes up again i can tell everyone the in and outs. Im with you so far now.

From a company point of view:

If it has 1000 employees each of £20000 salary ( theoretically). Am i right in saying then that they are saving 12.8% of the £25.00 for each employee weekly. So at a saving of £3.20 a week that amounts to £166.40 year multiplied by 1000 employees. A company saving of £166,400 yearly.

I personnally have a student loan so with a reduced salary im guessing this will save a pound a week or so. And also if anyone is claiming tax credits they will only declare the lower (new) salary, therefore getting an extra few quid a week of HMRC.
Also going that it may lower state pension would you say its definately advised to invest the savings rather than using it for every day living.
Thats all for now (sorry to be a pain)
Thanks

Debt_Free_Chick

Because of the effect on state benefits - including state pensions - it's not automatically a good thing for all employees. I would expect the company to take advice on this and give you some guidance e.g. if you earn more than £x but less than £y this is not likely to be of benefit to you.

jonnyb1978

Thanks, your a star!;)

Just found this on our company intranet if its of any use to anyone! Looks like i was wrong about tax credits.

Will Be SMART affect my entitlement to the basic state pension or other state
benefits?

To affect your entitlement to a basic state pension, your earnings would have to fall
below the threshold for paying NIC (£4,524 per year for 2007/2008). To ensure benefit entitlements are not affected, employees with earnings around this level should not opt in to Be SMART.

Will Be SMART affect my Tax Credits, Child Support Agency payments or Student Loan repayments?

Tax credits, as you may already know, are calculated on your taxable pay together with any savings or other income you may have. As your taxable pay doesn’t change with Be SMART your tax credits are unaffected. Child Support Agency (CSA) payments are typically calculated on your net pay. Be SMART may increase your net pay and so your CSA payments may also increase. Student Loan repayments are based on your gross pay. As Be SMART reduces your gross pay this may take you below the £15,000 repayment threshold and so delay your repayments.