Salary Sacrifice??

GraemeB

Hi

I've reproduced below the information from my employer and it seems like a good move, my current salary is 17.5K per annum.

I was thinking about sacrificing 5% but am a little confused about the application form, should I put 0 in the first part and 5 in the second part so I stop contributions from my net salary and sacrifice 5% from my gross salary.

Thanks

G.




Paying contributions to a pension scheme is a tax efficient way of saving for retirement as you receive tax relief on your contributions. To provide extra value for employees, have set up a Salary Exchange arrangement to further increase your savings towards retirement. An application form has been provided at the end of this announcement.

What is Salary Exchange and how does it work?

Salary exchange is an agreement between you and your employer where you exchange part of your contractual gross salary in return for a pension contribution. How much of your salary you give up is up to you.

In order to benefit from the contribution of 7% of your basic salary, you are required to contribute a minimum of 3.5% of your basic salary.

Under the salary exchange scheme the employer will continue to contribute 7%, (provided that you pay the minimum contribution), now expressed as a salary exchange.

The amount you exchange is taken from your gross salary. This reduces the income you receive. As your income will have fallen, the amount of income tax and national insurance you pay will also reduce as you are now paid less. The exchanged amount goes straight into your pension as an additional employer contribution.

Because your taxable salary is reduced also saves on their national insurance bill. have agreed that this saving will be reinvested back into your pension. You will, therefore, benefit from increased pension contributions, should you choose to use the Salary Exchange, by an amount equivalent to that saving. (See the examples in the Appendix for how this works).

Although you exchange part of your gross salary, your net take home pay will increase. This is because you pay less national insurance as your salary is reduced by the amount you have contributed to the Stakeholder Pension Plan. (See the example in the Appendix for how this works in practice).

Is Salary Exchange right for everyone?

You need to think carefully about whether salary exchange is right for you. Here are some of the things you should consider.

• If you decide to use salary exchange your salary must not fall below the national minimum wage.
• Your entitlement to state benefits such as statutory sick pay, tax credits, State Earnings Related Pension and the State Second Pension could be reduced as they are linked to your total gross earnings which will be lower after salary exchange.
• If your salary falls below £5,715 per annum, your basic state pension entitlement may be reduced as you no longer pay national insurance.
• As salary exchange is a contractual agreement you cannot stop it or change the amount until the contract ends. A Salary Exchange agreement will be made for a period of 12 months. An agreement may be altered within this period if you experience a lifestyle event such as divorce, marriage or the birth or adoption of a child.
• The Chancellor announced in April 2009 that, for high earners, there will be changes to the level of tax relief available. If your total taxable income is £130,000 or more (this total includes earnings from other employment and income from other sources such as savings or rental income), whether before or after salary is exchanged, you should take professional advice as to whether these changes might affect you.


Will my reduced basic salary affect credit rating for loans, mortgages etc?

can provide a document to confirm the arrangements that have been introduced. These will show your salary is made up of both your revised basic salary plus the amount of the salary conversion. You can then pass this information on to the appropriate lender. Mortgage reference letters will always refer to your notional basic salary.

Will my reduced basic salary affect other salary related company benefits?

will not reduce any salary related payments or benefits that you receive from the company. All your pay related benefits will be calculated on your notional basic salary (your pay before taking account of salary exchange adjustment). All future pay rises will also continue to be based on your notional basic salary.

The Benefits of Salary Exchange

There is an example in the appendix for a basic rate tax payer.






APPENDIX 1

DON’T FORGET THAT EVERYONE’S PERSONAL CIRCUMSTANCES ARE DIFFERENT. EVEN IF YOUR SALARY EXACTLY MATCHES THIS ONE YOUR TAXES AND TAKE HOME PAY COULD BE DIFFERENT.

Example: The Benefits of Salary Exchange – Basic Rate tax payer

Column A shows the position if you make a 3.5% contribution personally from salary
Column B shows the salary exchange position where your salary is cut by the amount of the gross contribution, which the employer pays into the pension plan.

Increase in take home pay

Your take home pay will increase from £13,841 to £13,910 as shown below:


A
B
Salary
£18,000
£17,370
Personal allowance
£6,475
£6,475
Taxable income
£11,525
£10,895
Tax payable
£2,305
£2,179
National Insurance (NI)
£1,350
£1,281
Net salary
£14,345
£13,910
Pension contributions (net) *
£504
Nil
Take home pay
£13,841
£13,910
Increase in take home pay

£69

* Pension contribution in column A shows the net amount. The extra £126 (i.e 20% tax relief) will be automatically added to your plan by the Government, making the total pension contribution £630.

The total gross pension contribution (employer and employee) will increase from £630 to £710 due to The company reinvesting their NIC saving of £80 into your pension plan.


A
B
Salary
£18,000
£17,370
Employer National Insurance (NI)
£1,571
£1,491
NI Saving reinvested into your pension plan

£80


Total increase in pension contributions


A
B
Your personal pension contribution (gross)
£630
Nil
Employer’s pension contribution
£1,260
£1,890
NI Saving reinvested into your pension plan

£80
Total pension contribution
£1,890
£1,970


THE GROUP STAKEHOLDER PENSION PLAN

Employee authorisation form to amend employee pension contribution and/or change to Salary Exchange

MY DETAILS:

Full name: ……………………………………………………………..

Date of birth: ……………………… National Insurance Number: ………………….

CONTRIBUTIONS:

Employer Contribution

Employer will contribute 7% of your basic salary each month provided that you pay the minimum contribution of 3.5%.

Employee Contribution

I wish to amend my employee contribution to:

Percentage of Basic Salary ( )% [You should enter ‘0’ if you want to stop paying contributions from net pay and start paying via salary exchange]

I wish to exchange salary equivalent to ( )% of my basis gross salary in exchange for the company contributing an amount equal to the salary exchanged on my behalf into the Group Stakeholder Pension Plan.

Changes to the percentage of salary to be exchanged can only be made annually.

If your total taxable income is £130,000 or more, whether before or after salary is exchanged, you should take professional advice as to how the Budget changes might affect you before entering into this arrangement for either increase of net contributions or salary exchange.

TO MY EMPLOYER:

I wish to amend my employee contributions to the Group Stakeholder Pension Plan and I authorise you to submit to Friends Provident the amendments to the Plan on my behalf.

I authorise you to pass information concerning me, which is required in connection with my membership of the Plan, to Friends Provident and to any financial adviser acting in connection with my policy. I authorise you to pass a copy of this Authority to Friends Provident if requested.

I give you permission (if I have not elected to contribute via salary exchange) to deduct my contributions from my net salary and to pass them to Friends Provident, to be applied to my policy.



Employee’s signature…………………………………. Date:…………………..

Paul_Herring

Salary Exchange

Why? Why do they confuse the issue by renaming something that is already widely known by one name to something else?

I was thinking about sacrificing 5% but am a little confused about the application form, should I put 0 in the first part and 5 in the second part so I stop contributions from my net salary and sacrifice 5% from my gross salary.

Percentage of Basic Salary ( )% [You should enter ‘0’ if you want to stop paying contributions from net pay and start paying via salary exchange]

I wish to exchange salary equivalent to ( )% of my basis gross salary in exchange for the company contributing an amount equal to the salary exchanged on my behalf into the Group Stakeholder Pension Plan.

Yes, 0% for the first question (since you want to stop contributing from net salary) and 5% (which is above the minimum 3.5% for this particular plan) in the second (to deduct the amount from your gross salary.)

jamesd

Yes, zero in first and five in second. It appears that your employer is putting in the whole of their employer NI saving. That makes this the best salary sacrifice deal you can get from the contributions point of view.

Use of a stakeholder pension can be a little more expensive than some other options that are available now but given your contribution level that's not something that you need to worry about for a few years. Whether it's good or bad depends on the investments and charges for those investments. A basic standard stakeholder pension agreement is 1.5% of the capital value each year, deducted in small daily pieces from fund values, then 1% for the rest of the time. It's worth checking what these costs are but it's unlikely to be worth you doing anything other than jumping at the opportunity.

Someone who was paying in at a faster rate might want to ask about making periodic transfers out to a pension scheme with no commission, purchased by paying an initial fee to an IFA. That can reduce the charges by 0.5% and be a better deal eventually. But that takes time and money going in before it can be worthwhile.

GraemeB

Thanks guys for your quick replies, I thought I'd check before committing myself to paper

Graeme

TheMatrix_2

3% of my gross pay is deducted towards my final salary pension before any tax or national insurance is deducted. Then my company match this contribution.

I am told it is better to do it this way as I pay less NI as does the company. It seems that way as my basic pay has gone up since I switched to this method. I'm told it will not affect my pension doing it this way, seems like a legal tax dodge any comments?

I've tried the calculator at http://www.listentotaxman.com/ but the NI figures are out, probably because of this scenario.

Paul_Herring

I've tried the calculator at http://www.listentotaxman.com/ but the NI figures are out, probably because of this scenario.

Are you putting in your gross pay before or after the deduction? To get the right numbers, you must put in your gross after the deduction.

TheMatrix_2

I tried it a number of ways, if I leave the pension blank and just put in Gross - Pens Contributions for the month the calculator reckons I should have paid £198.74 in NI yet I only paid £169.71 on the payslip. Tax is spot on give or take 5p

Mike_Chis

I am 64 this year and have been in a salary sacrifice scheme for about 3 years. Trying to save as big a pot as possible (about 80K today) with one year to work.

I earn 39K and have a 12K military pension on top - so I would be a higher rate tax payer. Salary sacrifice seems a great deal, as the company puts in 7.5% of my salary and ALL the NI savings. I curently sacrifice 30% but am thinking of going up to 50% for this final year.

To my simple mind, I am not only saving the NI, but also the income tax - although I often read that the tax side of it is "neutral". Am I wrong ? What do they mean by that ?

I guess it would be neutral if I was putting a similar amount into my stakeholder pension pot outside the salary sacrifice scheme and claiming it back at the end of the year.

To be honest, I probably would not be saving half as much if it was not for the simplicity of the salary sacrifice scheme. I wish it had been available when I started work 7 years ago at this company.

jamesd

You're gaining on the NI. The income tax is sometimes said to be neutral because if getting basic rate tax relief you save 20% then pay 20% on the income. But this ignores the 25% tax free lump sum on which no income tax is paid. At higher rate income levels the employee NI saved is only 2% but at basic rate income it's 12% so that helps to make salary sacrifice a good deal for income that would be taxed at basic rate.

For every £1000 put into the pension, ignoring investment gains or losses, with full employer NI payment into the pension:

Higher rate: £1138 in pension costing £580 in lost net pay. 25% is £284.50 back. Leaves £853.50 in pension pot at net cost in after tax income of (£580-£284.50) = £295.50. That's 2.88 times the final net pay loss left in the pension to produce income. 6 years to get back that net pay loss from income at 6% of capital as income.

Basic rate: £1138 in pension costing £680 in lost net pay. 25% is £284.50 back. Leaves £853.50 in pension pot at net cost in after tax income of (£680-£284.50) = £395.50. That's 2.16 times the final net pay loss left in the pension to produce income. 8 years to get back that net pay loss from income.

So 2.16 to 2.88 times the money foregone is left in the pension to produce an income. That looks like a really good deal to me.

Since you're more than doubling even the basic rate cost you might even consider using savings or borrowing to put in all but minimum wage and maximise the gain in income-producing money level.

Even if your employer wasn't paying in any of their NI it's a good deal: 2.27 times the higher rate net pay cost, 1.74 times the basic rate. 7.3 and 9.67 years to get back the net pay cost in income.

Dick_here

Paul_Herring wrote: »

Why? Why do they confuse the issue by renaming something that is already widely known by one name to something else?

Salary sacrifice sounds offputting, it suggests, well, a sacrifice. Salary exchange sounds more like giving up salary in return for something.