Salary Sacrifice??

oysterman

Received a letter from company saturday ref ''salary exchange''. It has been a bit sudden & were told today we have a meeting with the company that advises us tomorrow morning. Trouble is, i do not trust the company & think they are pulling a fast one(what i dont know)
What questions should i be asking them, i must admit i am a bit clueless.
The agreement they are proposing is we agree to a reduction in salary equal to my pension contributions & in return they increase their contribution to cover both their's & mine. Take home would increase slightly. How do i work out whether i would be better off or not. Cheers in advance

Paul_Herring

oysterman wrote: »

How do i work out whether i would be better off or not.

These will be rough calculations, since you may enter the wrong numbers, but could give you some idea (and steps 2 onward presume a defined contribution pension - the calculations for #2 may be complicated to do yourself if it's defined benefit)...

First off,
a) what contributions are currently (if any) are made
b) into what sort of scheme (defined contribution or defined benefit?)

1) Verify your current payslip using http://listentotaxman.com/index.php

2) Calculate the total gross amount going into your pension fund currently (if any) - don't forget to include any 20% rebate if made after deductions.

3) For salary sacrifice, subtract whatever contribution you'll be making from your gross salary and re-work your net salary (ignoring any contributions you put in for step (1))

4) Calculate the total gross amount that will go into your pension fund including your employers proposed contributions after salary sacrifice. (Will the company be offering to pay in any employer's NI that they'll save?)

Presuming you're already making contributions, the net amount in #3 may be slightly more the net amount in #1.

Comparing net amount from #1 + gross in #2 with net amount from #3 + gross in #4 may give you some indication of whether you'll be better off.

Finally you can compare #2 with #4 to see how much better your pension fund may be better off.

Note that a small resultant decrease in net pay in #3 can result in a larger subsequent increase in contributions in #4.

Asking the same questions of the advisors may provide some enlighenment.

DavidLaGuardia

jem16 wrote: »

It wouldn't impact on the level of tax relief you receive but it will impact how you receive it. With salary sacrifice you will be taxed on a lower salary so immediate tax relief. You will need to inform HMRC and have the additional allowance in your tax code removed.

This is not correct Salary sacrifice DOES mean an increased level of tax relief as well as saving on NI.

After paying tax plus NI = 42%, if you gross up the remaining £58 in the pound via tax relief, it only comes to £96.67. The missing amount is £2 is the NI paid and £1.33 is tax that cannot be reclaimed because a lower initial net figure weas used.

Salary Sacrifice means you get back NI and the ENTIRE amount of tax paid at source.

yerodretep

Apparently we're changing from Salary Sacrifice to Pay Conversion, :mad:are they not the same thing? If not someone please explain this difference also. Thanks!

Paul_Herring

yerodretep wrote: »

Apparently we're changing from Salary Sacrifice to Pay Conversion, :mad:are they not the same thing? If not someone please explain this difference also. Thanks!

From what I've seen thus far, "pay conversion" is the politically correct, non-official, name used by some companies for 'salary sacrifice.'

No doubt to remove the word 'sacrifice' and any negative connotations it may have, or to reduce the risk of offending some religious minority or something.

Certainly Google (still, since the last time I saw the phrase crop up) isn't coming up with anything useful for 'pay conversion' in relation to pensions.

penpon

hello all, my company shut its final salary scheme 2010, and introduced another scheme, cant remember the name now, lol. but along with it they combined salary sacrifice , i never went for the salary sacrifice because i was told it affects your s2p pension , could anyone give me any advice about this, cheers.

Paul_Herring

penpon wrote: »

i never went for the salary sacrifice because i was told it affects your s2p pension

1) Since salary sacrifice reduces your pay for the calculation of National Insurance, you'd be paying slightly less NI than if you didn't sacrifice.

2) The amount of S2P accrued each year was, I believe, based on the amount of NI you paid. (See the table at Wikipedia - which, I suppose more correctly, states it's based on your pay [after sacrifice] rather than the amount of NI, but it amounts to the same thing as far as S2P accrual is concerned.)


So if you pay less NI due to the sacrifice, you accrue less S2P.

But the NI you would have paid goes into your pension instead which should offset (somewhat/a little/a lot - depends how well your pension fund does) the S2P you 'lost.'

penpon

Paul_Herring wrote: »

1) Since salary sacrifice reduces your pay for the calculation of National Insurance, you'd be paying slightly less NI than if you didn't sacrifice.

2) The amount of S2P accrued each year was, I believe, based on the amount of NI you paid. (See the - which, I suppose more correctly, states it's based on your pay [after sacrifice] rather than the amount of NI, but it amounts to the same thing as far as S2P accrual is concerned.)


So if you pay less NI due to the sacrifice, you accrue less S2P.

But the NI you would have paid goes into your pension instead which should offset (somewhat/a little/a lot - depends how well your pension fund does) the S2P you 'lost.'

cheers paul thats pretty clear mate, in my oppinion i think ill stay as i am, cheers.

Paul_Herring

2 things:

1) Hang around for one of the experts 'round her to correct me on any inaccuracies if there are any.

2) None of that likely applies now, since the Government seem to be intent on getting rid of S2P (the £140/week pension reforms you may or may not have noticed in the news recently - if that comes in, there will be no S2P regardless of whether you would normally have accrued it or not; Telegraph article on the loss for future pensioners.)

penpon

Paul_Herring wrote: »

2 things:

1) Hang around for one of the experts 'round her to correct me on any inaccuracies if there are any.

2) None of that likely applies now, since the Government seem to be intent on getting rid of S2P (the £140/week pension reforms you may or may not have noticed in the news recently - if that comes in, there will be no S2P regardless of whether you would normally have accrued it or not;on the loss for future pensioners.)

worth keeping an eye on, interesting article, going to be a lot of unhappy people.