Salary Sacrifice??

kidmugsy

iaveight wrote: »

Say I earned a gross salary of 70 000 GBP I am paying 40 Percent tax on any earnings over 32010 GBP

No you're not. You need to add on the Personal Allowance to the £32010 to find the 40% threshold.

And then, yes you can avoid 40% tax by contributing to a pension. There's a limit to your total contributions per annum, partly avoidable by carrying forward unused limit from previous years. See many previous discussions on this forum.

RobStaffs

I currently pay 7.5% into my pension and my employer pays 10%. My employer utilises the salary sacrafice scheme and this works well for both. I have a couple of questions.

Under the new pension rules would it be worthwhile increasing my personal contributions? I am 50 this year.

Secondly I have always wondered if I am getting the full tax relief for this. I am a 40% tax payer. I am convinced I am but always have this nagging doubt in my mind. But my payroll dept tell me that I get the full 40% relief.

kidmugsy

RobStaffs wrote: »

Secondly I have always wondered if I am getting the full tax relief for this. I am a 40% tax payer. I am convinced I am but always have this nagging doubt in my mind. But my payroll dept tell me that I get the full 40% relief.

My understanding is that if your employer paid you an extra £100 gross you would have £40 income tax and £2 NIC deducted, and therefore receive £58 into your bank account. But instead he diverts the £100 into your pension so you get the whole £100 credited there. That's the sense in which you've avoided the 40% tax and the 2% NI. Some employers also kick in part of their own NIC saving, which is the veritable clotted cream on the deal.

MiserlyMartin

jamesd wrote: »

Devon

I'm entirely happy for a person earning £60,000 to choose to pay £47,354 into a pension to get down to minimum wage and to get working tax credits. If the person was my age, single with no children and with no other income other than £12,646.40 they would be entitled to working tax credits of £63.10 a week, a total of £3,281.20.

Can this legitimately be done? Not that I earn that much.... But paying a massive amount to your pension with salary sacrifice then claiming WTC seems kind of wrong to me...

kidmugsy

MiserlyMartin wrote: »

But paying a massive amount to your pension with salary sacrifice then claiming WTC seems kind of wrong to me...

The concept of "wrong" was pretty much banished from our welfare state in the reforms of the '45 government.

Paul_Herring

MiserlyMartin wrote: »

Can this legitimately be done? Not that I earn that much.... But paying a massive amount to your pension with salary sacrifice then claiming WTC seems kind of wrong to me...

Wrong? Why?

Well the other ways of doing this sort of thing include having kids and having 'everyone else' fund the kids' welfare, schooling, parents' *ernity leave, CTC, etc. You get the idea...

I think simply cutting your wage down to minimum like this if you don't have kids is cheaper on the state than having the kids and claiming all of the above.

xylophone

Someone mentioned to me that it is possible to have a salary sacrifice into a 'pension ISA' which can then be used for school fees if we so wish,

Mystified!

Is the idea that your husband ( and you if high earner) will pay sufficient into a pension to take you out of 40% tax, restore payment of family allowance, become eligible for tax credits etc?

http://www.theguardian.com/money/2013/sep/28/child-benefit-pension-contributions-higher-earners

MiserlyMartin

Paul_Herring wrote: »

Wrong? Why?

Well the other ways of doing this sort of thing include having kids and having 'everyone else' fund the kids' welfare, schooling, parents' *ernity leave, CTC, etc. You get the idea...

I think simply cutting your wage down to minimum like this if you don't have kids is cheaper on the state than having the kids and claiming all of the above.

Well if you put it like that then yes ok I wouldn't feel bad. Its true that some people are popping out kids just to get all that. So I ask my company to reduce my salary to £13,100 (now). Then what, how do you go about claiming WTC? (never claimed any of these things in my life...)
EDIT: calculator at taxcredits.hmrc.gov.uk says £850 with a salary of only £10000, where do you get your £3,281.20 from?

xylophone

£850 with a salary of only £10000,

Seems to be up to

£1275 for a single person?

https://www.gov.uk/government/publications/tax-credits-entitlement-tables-working-and-have-no-children/tax-credits-entitlement-tables-working-and-have-no-children

Spidernick

Apologies if mentioned before (I haven't real the whole of this long thread), but I wanted to bring some additional benefits to smart pension payments to people's attention, in case not already highlighted. These are (probably unintended) anomalies that mean that the effective tax, etc. savings on pension payments into an employer's salary sacrifice scheme are significantly higher than would ordinarily be the case.

If you receive child benefit and earn between £50K and £60K then making pension payments to a Smart pension scheme really is a 'no brainer' as the Americans would say. In addition to the 42% tax and NI saving (ignoring any employer matches, sharing the employer's NI saving. etc which only add to the benefits), if you reduce your salary in these circumstances you will also have the benefit of a reduced Child Benefit claw back.

For someone with three children the current child benefit for a full year is just under £2,475. As the claw back is 1% for every £100 over £50K then every £100 payment into a pension between the two limits will have an effective savings rate of around 66.75%! As I say a real 'no brainer' if you can afford to sacrifice salary into a pension. Obviously the effective rate will vary depending on the number of qualifying children, but will still be worth doing even with only one qualifying child.

Even if you earn over £60K gross, it still may be worth making payments into the scheme for these purposes, if you can bring the taxable income down to below £60K, as you would then get some relief at the kind of rate mentioned above (again depending on how many qualifying children you have).

The same is true for those earning between £100K and £120K, whose £10K personal allowance is then phased out. If you are lucky enough to be in that position then your effective tax rate between these two amounts is 60% (another anomaly of the system), so again it is worth making pension payments to bring you below the £100K limit if you can.

Obviously the £40K annual limit and £1.25M lifetime limits also need to be considered, but I doubt that there will be many people in these income brackets for whom these are an issue.