Impact of salary sacrifice on salary related "things"

property.advert

I'm just reading about salary sacrifice and one thing which seems to come up is the effect is has on other things. The biggie (as it would seem with my limited knowledge), defined benefit pensions is not on my agenda but what else is affected ?

I'm guessing things like mortgages where you have to state a salary. However, it is no different in the end if the employee decides to put a lot of their salary into a pension, better in fact. It is just the headline which will be hit but would that matter ?

Credit files would not see a large salary going into the bank and then a large withdrawal so I guess they would be affected.

Yet I guess you can stop it when you want so it remains a high salary ?

Maybe I am way off base here but it seems salary sacrifice might cause some issues down the line.

Any experiences or comments most welcome.

chris_m

As it works where I am, the sacrifice is made at source so bank accounts just see the salary going in as normal, slightly higher than without the sacrifice because of the reduced NI payment.
Mortgage references, etc are told the "real" gross salary, not the reduced one after the sacrifice.

property.advert

I guess I should have said I am talking about large amounts. Perhaps a £50k sacrifice. This would have the effect of drastically reducing the net salary.

bristol_pilot

Depends how much is left after the sacrifice. If the salary reduction is really drastic - down to sub- minimum wage levels - you can end up losing out on some state benefits such as the state pension. If the £50k represents no more than about an 85% reduction, you should have no such worries.

getmore4less

AIUI you cannot go below min wage.

The big one is enhanced redundancy payments which do not include pension payments.

bristol_pilot

You cannot go below min wage per hour, true. There is IIRC a potential problem with part-timers who may earn so little after sal sacrifice that state pension could be lost. If OP was planning on putting entire wage into sal sac and living off investment or spouse income, that could be a theoretical issue.

OP should check that any contractual redundancy payments would be based on pre-sacrifice salary. Same goes for mortgage / credit references.

property.advert

My assumption, though not back by facts as the situation is hypothetical at the moment, is that if the headline salary was 100k, then that would be the amount on the books. The 50k sacrifice would simply be a tax efficient way of distributing the same funds from the company's perspective.

I also presume that a salary sacrifice can be halted at least annually, if not immediately.

So far we have:

Redundancy
Credit enquiries
Ability to reverse / stop

bendix

I salary sacrifice heavily - over £30,000 a year, mostly into my pension but also some other minor benefits to. The comment about redundancy is misleading. When my company laid off people last year, their redundancy packages were based on on the gross salary, not the salary sacrificed balance.

For a variety of reasons (mostly due to the tax authorities) we can only make changes to our salary sacrifice arrangements annually, unless there is a significant lifestyle change (getting married, having kids etc). I tried to make changes last month due to the higher tax rates being introduced, but such a change wasn't deemed acceptable to HMRC.

jamesd

Salary sacrifice can normally be stopped if you move home (covering the mortgage case). Depends on the rules of the specific scheme. Giving the before sacrifice salary is fine for loans.

You can't stop salary sacrifice immediately except in the list of situations given in the scheme rules. If it's at your discretion with say monthly changes then HMRC doesn't treat it as a real sacrifice because it's really solely at your control. Annual change is fine.

jamesd

You should also think more carefully about how to do this. If we assume that higher rate tax relief is eliminated, it's not efficient to sacrifice from £100k to £50k each year. It's better to alternate, sacrificing little or nothing in year one then £90k (to minimum wage) in year two. Repeat. This is because in salary sacrifice you save the employee NI. That's one to two percent (depending on changes) in the £50-100k income band but eleven to twelve percent in the basic rate band. So alternating gets you almost 50% extra tax relief.

property.advert

jamesd wrote: »

You should also think more carefully about how to do this. If we assume that higher rate tax relief is eliminated, it's not efficient to sacrifice from £100k to £50k each year. It's better to alternate, sacrificing little or nothing in year one then £90k (to minimum wage) in year two. Repeat. This is because in salary sacrifice you save the employee NI. That's one to two percent (depending on changes) in the £50-100k income band but eleven to twelve percent in the basic rate band. So alternating gets you almost 50% extra tax relief.

I understand your logic and before I plug the figures in my Excel model it does look ok but we do have 40% tax relief at present. I am also concerned about the differing treatment of one off payments into pensions as opposed to regular amounts, something which hit those when the goalposts were moved at 130/150k.

Sacrificing to your tax free allowance seems a fine thing, as it avoids the NI on the circa 6.5k to 50k amount, as you rightly point out. I had not thought of that but then again I have not looked at this in light of a 20% maximum and obviously it does not work in that environment.

It is a pity you cannot borrow money from your pension and salary sacrifice the lot every year !