Salary Sacrifice??

Paul_Herring

But isn't it covert lying, as I am actually still receiving the same nett income?

Not really, because you aren't getting the same Gross income now which is what I believe tax credits are based on.

jamesd

It's not covert lying or lying of any sort. The guidance on tax credits is explicit that pension contributions are intended to reduce the income that counts, increasing eligibility for tax credits.

This is entirely sensible when you think about it. By making pension contributions you're decreasing the chance that you'll be claiming means-tested benefits later in life.

Do mention to your employer that there are benefits to childcare payment via salary sacrifice.

If there are higher rate tax payers in the company it's also worth mentioning that the normal 1% NI saving for them is not a great incentive to make extra pension contributions to a company scheme and save the company money. Splitting some of the saved employer NI may be enough to cause these employees to use the company scheme instead of their own - and using the company scheme saves the company it's part of that split, unlike using an outside pension.

lias

Thank you, that makes perfect sense.

I feel much better now

LongTermLurker

Have I got this right?

My employer already matches my pension contributions and is about to offer 6.4% employer NI rebate via salary sacrifice. So ignoring the reduced employee NI contributions in the upper tax bracket, assuming my current (without SS) gross contribution is x, the total contribution will be the combined figures below

self = £x
employer = £x
employee NI = 11%(x)
employer NI = 6.4%(x)

or 2x + 17.4%(x) ?

... and whether I use SS or not, the same 80%(x) comes off my pay?

Also, when the guy was talking about it, he said it's worthwhile for basic rate taxpayers above a certain threshold and a no-brainer for higher rate tax payers - why's that? (other than 17.4% of £40k is more than 17.4% of £20k)

jamesd

The higher rate tax payers get the higher rate tax relief money added to their pension immediately instead of having to seek a tax refund with a tax return. That means that they get the money making money for them sooner and with less hassle.

Without the sharing of the employer NI the 1% employee NI that a higher rate tax payer can save is not great enough to use a company scheme unless it happens to offer a better deal for other reasons. The immediate tax relief is one of those possible reasons.

Freefall123

If i do salary sacrifice and my current £42000 wage drops to say 39500 what will be the impact on the second sate pension whatever its called now - I am contracted in?

I think I read somewhere that this is going to be capped so above what level of earnings will it make no difference.

Thanks

Freefall

jamesd

The upper earnings limit for 2008/9 is £770 a week, 40040 a year, so it seems that there would be some reduction.

I expect that there's little chance that the loss to S2P would be greater than the extra pension gained from making contributions via salary sacrifice and not paying the NI on the money.

stamboy

If I decide to salary sacrifice and £4k of my £15k earnings so I'm left with £11k.

How does the £4k get accounted for in my stakeholder pension. Does my employer pay the £4k in and does it get grossed up at all? Or does it get grossed up on my tax return by me?

I'm a bit confused perhaps someone could advise.

Also what would happen if I say salary sacrificed £9k leaving me with just £6 salary which is my annual tax free allowance. Surely then I wouldn't get any tax back would I (i.e. gross ups) as I wouldn't be paying any tax, only NI?

Thanks

jamesd

Your employer pays in the before tax and NI amount, so you'd get the full 4k paid in immediately without any tax delays. If it wasn't salary sacrifice you'd still have to pay any NI, so you gain from that saved NI as well as by not waiting for the tax repayment.

If you salary sacrificed 9k to go to 6k salary your employer would have to explain why you were being paid less than the national minimum wage. In practice I expect that they would refuse to do this and would restrict you to minimum wage.

If your income would be taken below your personal allowance you'd want to stop the salary sacrifice at personal allowance level and take the pay. Then make direct contributions yourself. Someone not paying tax can make 3600 a year of payments into a pension and still get tax grossing up even though they didn't pay any tax.

stamboy

jamesd wrote: »

Your employer pays in the before tax and NI amount, so you'd get the full 4k paid in immediately without any tax delays. If it wasn't salary sacrifice you'd still have to pay any NI, so you gain from that saved NI as well as by not waiting for the tax repayment.

If you salary sacrificed 9k to go to 6k salary your employer would have to explain why you were being paid less than the national minimum wage. In practice I expect that they would refuse to do this and would restrict you to minimum wage.

If your income would be taken below your personal allowance you'd want to stop the salary sacrifice at personal allowance level and take the pay. Then make direct contributions yourself. Someone not paying tax can make 3600 a year of payments into a pension and still get tax grossing up even though they didn't pay any tax.

Thanks, so in the first instance (£4k), I don't need to fill anything on my tax returns in terms of pension contributions in order for it to be grossed up as grossing up doesn't happen? Secondly, how much would be put into my pension in total including grossing-up? £4k?

How would the last option work where you mentioned the 3,600 grossing up? Would I put down £3,600 personal contributions on my tax return and the Govt would gross up by 20% effectively making my total in the pot of £3600+£720=£4320?