Salary Sacrifice??

iforwms

Well it's taken me 3 days, but I've finally read through this entire thread, very useful!!

I have just started work after graduating in the summer, and have just had the pension scheme bumper pack etc for which I need to sign up to in the coming months.

They offer to match employee contributions up to 8.5% of the gross salary, plus they give 85% of their NI contribution towards the pension pot as well. I have been reading around and it seems that, due to compound interest etc, my best bet is to start my pension fund with an 8.5% contribution.

My gross income is £24.5k, or with the full salary sacrifice, £22,417.50. A few people have mentioned that a salary sacrifice on a lower income is not as beneficial. Would it be worth it for me?

From what I can see, I'd be getting a net salary of £17,162.65 with an 8.5% contribution, decreasing to £16,307.65 in April when my student loan contributions begin.

So in my pension pot after a year I'd get:

£2082.50 from my salary
£2082.50 from employer contributions
£2043.81 from the 85% of the employer contribution

Plus the tax and NI relief on the £2082.50, which would be £417.10 and £249.90 respectively.

Is this all right? I used a website for some of the values, but it's late and I'm getting tired.

Am I correct, and if so, is it worth opting for the salary sacrifice? (Also, is a money purchase plan the same thing, or a different beast altogether?)

Sorry for the long post, but thanks in advance for the help!!

-Ifor

jamesd

Your income isn't low enough to be a concern and this scheme is generous, so exploit it as much as you can.

The employer pays NI at 12.5% of your pay, in addition to the NI you pay. Your NI part is taken care of by deducting your pension contribution by salary sacrifice, so that goes into the pension. Theirs isn't done automatically, it's up to them to decide to do it. In this case they have decided on 85% of 12.5% so 10.625% of the salary you sacrifice. You're sacrificing 2082.50 and 10.625% of that is 221.26. So:

1. 2082.50 from your salary, before income tax and employee NI are deducted.
2. 2082.50 from 8.5% matching employer contributions.
3. 221.26 from the employer NI
4. income tax relief already allowed for in 1.
5. employee NI already allowed for in 1.

The other 15% of the 12.5% is probably used for administrative costs or to fund other employee benefits.

iforwms

jamesd wrote: »

Your income isn't low enough to be a concern and this scheme is generous, so exploit it as much as you can.

The employer pays NI at 12.5% of your pay, in addition to the NI you pay. Your NI part is taken care of by deducting your pension contribution by salary sacrifice, so that goes into the pension. Theirs isn't done automatically, it's up to them to decide to do it. In this case they have decided on 85% of 12.5% so 10.625% of the salary you sacrifice. You're sacrificing 2082.50 and 10.625% of that is 221.26. So:

1. 2082.50 from your salary, before income tax and employee NI are deducted.
2. 2082.50 from 8.5% matching employer contributions.
3. 221.26 from the employer NI
4. income tax relief already allowed for in 1.
5. employee NI already allowed for in 1.

The other 15% of the 12.5% is probably used for administrative costs or to fund other employee benefits.

Thanks for the quick response James, very helpful! I will be filling in the relevant forms ASAP! :money:

kingboyk

Thanks James, understand it now! Hoping to get an answer from my employers tomorrow.

elizw

hello

Please could someone help me.

I don't have much in pension contributions and have been with my employer for 3 years.

We have had a pension talk today to see if we want to join the new Group Personal Pension Scheme, the old one being in deficit. Working in the financial sector, I am a little suspicious of the motives behind these.

Could (or is it likely) they will stop adding the 12% whenever they choose to - It does have the clause in it saying they reserve the right etc.

Am I then stuck with it? I cannot see anything about changing my mind

As I was at home with the children for some years and then worked part time, will paying less NI affect my state pension entitlement . I know it says you should pay for 30 years but it doesn't say how much you need to pay.

I earn £16,000 at present - how much pension should I pay without it affecting anything else?

U can;t help feeling there is some sort of catch to this.

Thank you anyone who replies.

Lxxx

Quick one to all you experts. I contribute to salary sacrifice at the moment, £2500k/yr from a basic salary of £32500, and employer adds an extra 10% on from their NI saving, and have done for the past 4 years. I then get variable bonus payments per year of between £10k-£30k per year. I haven't filled in a tax return over this time as I (naively) wasn't aware I needed to.
Can I retrospectively claim back some of these salary sacrifice amounts via my tax return this year, or do I get the 40% tax benefit at source. I'm a wee bit confused on this one.

Gracias

Debt_Free_Chick

You get the tax relief at source. I think that your salary is actually £35k, but due to the sacrifice, it's split as £32,500 "pay" and £2,500 (employer's) pension contribution, in lieu of your personal contribution. If that's right, then you are already getting the tax relief at source as the £2,500 which the employer pays to your pension is not taxed as pay.

walshywalsh

JD and DFC you deserve knighthoods for the info posted on this subject. Perhaps you could post up a URL to your favourite charity and let the thousands on here donate a portion of their saved tax.

If you've answered this earlier just say so and I will trawl through again. I'm looking to persuede my new employer (job still in the balance so maybe jumping the gun a bit here) to allow me an 80% sacrifice, this would leave me with the minimum wage. Would this mean the company was contributing 4 x my new salary and therefore 3 x salary would not be a non-taxable expense from a corporation tax point of view ?

simple example
before SS
Company Turnover 100k

my PAYE wages tax and NI 50k
employer NI contibution at 12% 6k
Company pays CT @20% on 44K = 8800

after SS
turnover 100K
PAYE Wages tax and NI 10K
employer NI 1200
employer Pension contribution 40K
Now only 10K wages and 10K of the pension contribution and £1200 NI are regarded as expenses that wont have CT applied.

company NI saving £4800 -
Company CT liability 100k minus £21200 = £78800
CT @20% of £78800 = £15760

If you get the time I would be happy to know I've got this all wrong.

thanks

Judwin

walshywalsh wrote: »

JD and DFC you deserve knighthoods for the info posted on this subject. Perhaps you could post up a URL to your favourite charity and let the thousands on here donate a portion of their saved tax.

If you've answered this earlier just say so and I will trawl through again. I'm looking to persuede my new employer (job still in the balance so maybe jumping the gun a bit here) to allow me an 80% sacrifice, this would leave me with the minimum wage. Would this mean the company was contributing 4 x my new salary and therefore 3 x salary would not be a non-taxable expense from a corporation tax point of view ?

simple example
before SS
Company Turnover 100k

my PAYE wages tax and NI 50k
employer NI contibution at 12% 6k
Company pays CT @20% on 44K = 8800

after SS
turnover 100K
PAYE Wages tax and NI 10K
employer NI 1200
employer Pension contribution 40K
Now only 10K wages and 10K of the pension contribution and £1200 NI are regarded as expenses that wont have CT applied.

company NI saving £4800 -
Company CT liability 100k minus £21200 = £78800
CT @20% of £78800 = £15760

If you get the time I would be happy to know I've got this all wrong.

thanks

Not sure what you're getting at here. A company doesn't pay CT on turnover, it pays it on profit. Both salary and pension contributions come off the balance sheet first - reducing profit and therefore the liability to CT. Your argument appears to be that the more you pay me the less CT the company has to pay. Whilst that's true, what are any other employees going to say if the company ups your benefits ?

If you are an employee of a company with little or no say (i.e. is not a director or large share holder), then the way to persuade them to do SS is...

[Currently]
Your Salary is £50K. The cost to the company of your employment is £50K + 12.8% NI = £56.4K

You then need to persuade them that any changes you are trying to make don't cost the company any more than the £56400 that you're currently costing them

[Pension Salary Sacrifice]
Reduce your salary to £10K. The cost to the company of your employment is now £10K + 12.8% NI = £11280. Then get them to pay the full 'savings' on the cost of your employment (£56400-£11280) = £45120 into your pension plan. Total cost to the company is still £56400, but the way it's paid to you is much more to your benefit than it was before.

Notes:
1) Some companys decide there is an "administrative cost" to the company in SS, so they may decide not to contribute some/all of their 12.8% NI saving.

2) Reducing your salary and hence NI contributions can/will affect your SERPS/S2P pension from the state.

3) NI contributions aren't 12.8% flat - they're banded with thresholds. So my sums might not be quite right http://www.hmrc.gov.uk/rates/nic.htm

Cheers,
Judwin

walshywalsh

Thanks for your input Judwin, my CT calculations in both instances were based on profit - i.e 20% of 44K = 8800 - the 44K is profit taken after salary / Employer NI deductions.

The scenario I mention is fairly uncommon, if the company was only contributing 100% of my new 10K salary they would not lose out. However, in the case of SS only 20K + employers NI will come off the companies gross turnover before making the remainder liable to CT, hence, 100k minus (20000 salary & Company pension contribution) minus (1280 NI) = £78780 profit

This particular query has arisen as over the last 2 years having my own company I was reliably informed by my accountant that the company could not get CT relief on Pension contributions greater than 100% of any employees salary. As this was a one man band IT company I was taking a small salary and the rest in dividends to avoid paying additional employee/employer NI. Obviously, my company could contribute more than my PAYE based salary if it wished but would be pointless as double taxation would arise (CT and personal tax when the pension was drawn)

thanks for the prompt reply all the same