Salary Sacrifice??

jamesd

jonnyb1978, sorry to hear that it didn't work out. Salary sacrifice pensions are the best pension deal going. Lets take that 20,000 example.

At 20,000 income there's 11% employee NI and 12.8% employer NI to pay on the money in the interesting range. Now that drops to 18,700 income and the 11% employee NI and 12.8% employer NI can be used either to add to the pension or reduce the cost of the contributions.

The 1,000 employees collectively gain 11% of 1300x1000 and the employer gains 12.8% of 1300x1000, £143,000 a year for the employees and £166,400 for the employer.

It's not uncommon for the employer to offer to split some of their saving, perhaps half of it so the employer saves £71,500 and the employees gain another £71,500, a total of £214,500 for them.

Or the benefit could be split exactly 50:50, dividing 143,000 + 166,400 evenly, with £154,700 for each.

A 50:50 split isn't quite "fair" because the employees are losing some S2P and benefits value so it's reasonable to ask the employer to recognise that and shift it so the employees get a bit more than 50% to cover their lost state pension and benefits values. For the employer it's all gain other than the administrative and persuasion work.

Best to discuss with the other employees, show them this discussion and get your representatives working on a fair way to divide the spoils. It's free money from HMRC so it's worth some work to get it.

jonnyb1978

Thanks. Im all for it now to be honest. I was wrong last time out as im guessing i did not have the full facts. The only problem with work colleagues is either they still think it will affect them when it wont or they see the companies savings to be unfair compared to ours. The company employes over 1200 staff and i think they will make near the £200000 mark a year. They are saying they will re invest into the company but staff are saying why should they benefit a mere £2.75 to enable the company save a lot more. My reasoning now is i dont care how much they make as it will be giving me a projected £6000 lump sum. As savings will slightly increase each year this figure will rise so in my eyes its free money when i retire.

Not sure if i can just opt in though when i want or i have to wait until a certain date. Will ring relevant department tommorrow to find that one out.

DUS

Hello,

I once believed I had understood the benefits of paying into my SIPP via a salary sacrifice agreement with my employer but after some emails going back and forth between my SIPP provider (HL) and the company handling PAYE for my employer last week, this belief has now changed into complete confusion at my end. I really feel bad about this and hope to find some info/thoughts here on this thread.

1/ My employer is an Austrian based company and has no legal entity here in the UK. Therefore, they make no NI contributions and the PAYE scheme is in my name (whatever the latter means).

2/ I wanted to use GBP 500 from my monthly salary and have it topped up 625,-- in step 1 (20% personal pension tax relief @ HL) and then to 800-something in step 2 through self assessment claim.

3/ Last month, the UK service company handling PAYE for me in the UK has now paid 500 into my SIPP but last week, I received a letter from HL confirming that they have received the contribution but wouldn´t claim tax relief for this amount since they treat this as an employer contribution.

4/ I sent an email to HL in order to better understand why they wouldn´t claim tax relief. They replied:

"Normally a Salary Sacrifice is taken out of your gross pay this means that the payment is made to Hargreaves Lansdown prior to deductions for income tax or national insurance. Meaning that the contribution is gross when paid to us. As you have not paid income tax on the value of a salary sacrifice payment it is not eligible for tax relief.

If the payment was not actually made as part of a Salary Sacrifice arrangement and was meant to have been a personal contribution deducted from your net salary please ask your employer to confirm this in writing on company headed paper. We will then amend our records and apply for the basic rate tax relief."

5/ After reading the email, I thought: "Bloody hell, this actually sounds quite logic" and now I can´t even answer the most basic question to myself anymore.

6/ To make things even more confusing for me, I now received another email containing some calculations from the UK company handling PAYE. In this email they say: " [FONT=&quot]If you are a 40% tax payer, then you are better off paying the pension without the salary sacrifice option because you wil get £250 back as tax relief."


Bottom line is, I am now completely lost and don´t know what to do but have lots of probably very, very stupid questions:


1/ I earn above 60k a year, so am a higher rate tax payer. Why am I better off paying into my SIPP using my taxed money rather than via salary sacrifice, as claimed by the company?


2/ If the company that is handling PAYE for me, deducts the GBP 500,-- from my taxable income (prior to calculating the tax and NIC on the remaing part of my salary) and then pays this untaxed 500,-- into the SIPP, wouldn´t this be better for me since I get the full tax relief straight away rather than in 2 steps (20%, 20%), with the last 20% only being paid after the end of the tax year via self assessment.


3/ If I am better off asking 500,-- (of untaxed salary) to be paid gross into the SIPP (with no further tax relief, obviously), I now even fail to see the whole point of ss for me. Well, I fear this is now a situation of not seeing the forest for the trees but that´s how I feel at the moment; lost!

The only thing I believe I still understand is that if I pay 500 gross into the SIPP, I would then not achieve my plan to actually pay approx. 800 into the SIPP after tax relief. So I would have to ask the company to deduct the 800-ish from my salary and pay this into the SIPP. Alternatively, I could pay 500 of my taxed salary into the SIPP and get it grossed up (20 + 20), right? The only advantage of version 1 would be that I save my NIC on the amount whilst in version 2 (500 out of my net salary) I wouldn´t be able to "recoup" NIC. Correct?

I[/FONT][FONT=&quot]n the end, the only thing I want to do is to pay into a SIPP in the most tax efficient way. Last month I thought that doing this via ss would be the best way for me, but now I am no longer convinced. [/FONT]

How can I calculate what is the best, most tax efficient way for me to pay into my SIPP? Salary Sacrifice? Paid gross? Paid net? ...? I´ve never felt so confused about my private finance. Please help!

Thank you!

DUS
[FONT=&quot]



[/FONT]

DavidLaGuardia

DUS wrote: »

Hello,

I once believed I had understood the benefits of paying into my SIPP via a salary sacrifice agreement with my employer but after some emails going back and forth between my SIPP provider (HL) and the company handling PAYE for my employer last week, this belief has now changed into complete confusion at my end. I really feel bad about this and hope to find some info/thoughts here on this thread.

1/ My employer is an Austrian based company and has no legal entity here in the UK. Therefore, they make no NI contributions and the PAYE scheme is in my name (whatever the latter means).

2/ I wanted to use GBP 500 from my monthly salary and have it topped up 625,-- in step 1 (20% personal pension tax relief @ HL) and then to 800-something in step 2 through self assessment claim....................

[FONT=&quot]...........................I[/FONT][FONT=&quot]n the end, the only thing I want to do is to pay into a SIPP in the most tax efficient way. Last month I thought that doing this via ss would be the best way for me, but now I am no longer convinced. [/FONT]

How can I calculate what is the best, most tax efficient way for me to pay into my SIPP? Salary Sacrifice? Paid gross? Paid net? ...? I´ve never felt so confused about my private finance. Please help!

Thank you!

DUS

The UK company hadnling the pay are talking out of their bottoms!

Lets make this simple.

You want to contribute £500 of your net pay

You have indicated you understand that A higher rate tax payer can pay an amoujnt net of basic rate tax, which HMRC add to and then the other 20% is reclamed.

This means that the cost of any contribution is umltimately 60%. So, in your case you could put in £666.66, this is topped up to £833.33 and you later reclaim £166.66. Cost = £666.66 - £166.66 = £500

The benefit of salary sacrifice can be seen when you consider that that after 40% tax and 1% NIC, £500 net is 59% of Gross pay which makes gross pay £847.46.
Get your employer to pay this amount in directly and
1. An individual is not liaible for tax/NI on a contribution from their employer and the company making the pay should adjust this according to what goes directly into your SIPP.
1. It is a higher figure because of avoiding the employee NIC as well as tax (in fact the tax avoided is slightly higher as well)
2. You do not have to wait to reclaim 20% of the relief.
3. It has still cost just £500 of net pay.

DUS

David,

Thanks for your reply, that´s greatly appreciated!

So, if I understand you correctly and on the basis of me wanting to invest £500 pounds of my net pay into my SIPP, you would ask the employer to pay £847.46 gross into the SIPP (via salary sacrificce) since:

a/ My net monthly salary would then be reduced by exactly £500 (my planned net investment)
b/ This (e.g. the salary sacrifice) is the only way for me to safe the 1% NIC
c/ I would benefit from a 40% tax relief straight away rather than claiming the "remaining" 20% via self assessment after each tax year.

Is this correct or am I misinterpreting you?

So, to pay in £500 from my taxed salary would be stupid/not tax efficient,since I won´t benefit from the NIC savings and also would lose time (and potentially interest on my holdings) between investing the money and being credited with the 20% tax relief claim via self assessment. Am I still correct with that assumptions?

Thank you!

DUS

jamesd

jonnyb1978 wrote: »

staff are saying why should they benefit a mere £2.75 to enable the company save a lot more.

For each 2.75 gained by a basic rate employee the company would gain by 3.20 so it's not exactly a whole lot more. It's possible that all it'll take is a bit of negotiation so the employees get a 50:50 split plus a little extra to cover the reduced benefits.

jamesd

DUS, you're almost correct that if income tax was the only factor then to get 500 less of net pay you'd ask them to pay 833.33 by salary sacrifice because 0.60 * 833.33 is 500. You also save 1% employee NI on the 833.33 so the pension would end up getting 841.66 paid into it.

You're completely correct on b and c.

You wrote earlier that your employer isn't paying NI. Who is? Is there simply some gross pay agreement and you absorb the employer NI cost yourself? If so, you'd also be saving the employer NI because there would be no need to pay that on the sacrificed money.

jonnyb1978

jamesd wrote: »

For each 2.75 gained by a basic rate employee the company would gain by 3.20 so it's not exactly a whole lot more. It's possible that all it'll take is a bit of negotiation so the employees get a 50:50 split plus a little extra to cover the reduced benefits.

Yes i understand that and i have now sent of my form to join the scheme.
But what they are saying is with over 1300 employees. Staff are saying if everyone takes part why would they want to save 2.75 to enable the company to save £200000 (approx) overall and line their own pockets. The company say it will be reinvested back into the company, but in all honesty i dont care what they do. Its extra funds in my pension pot.

lewic

What about the bigger picture here?

NI was set up for a purpose - to provide a free healthcare system and state pension for all. If all companies set up salary sacrifice schemes how many billions will be lost in NI contributions? How many more elderly people are going to die in poverty from lack of basic care?

This government (and future Tory governments) seem intent on privatising healthcare, and this is just another nail in the coffin.

The company I work for has just introduced such a scheme (in a similarly underhand way that other posters have described) and I would be about £200 a year better off for it. But I refuse to sign up on principle.

The union leaders who are promoting this as a good thing should be ashamed of themselves.

jonnyb1978

lewic, i totally respect your point and that was one of the reasons last time around i didnt opt in. The moral issue. If everyone did do this it would be decreasing NI contributions, and the government will have no choice but to act and add a tax on here and there to make up the short fall. But they do this now anyway for whatever reason they want so personally dont think it would make much difference over the cause of our lives as it will be to difiicult to work out which one would of been the better. To opt in or out. Though individually i predict i will make at least £7000 extra when i draw pension. They reduced VAT a few months back, little known to many the increase the tax on tobacco and alcohol products to offset this. Therefore to some making all this VAT deduction a waste of time. Whether you opt in or not you will always be subject to stealth taxes. I very rarely watch the BBC but i have put up with their extortionate license fee.