How much should I be paying into a pension?

jem16

ffacoffipawb wrote: »

No:-

What dunstonh said above was "That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief."

Net pay is not reduced by 4% which is what he states in my red emphasis above, that's all I was saying.

Both you and Dunstonh are saying the same thing in a different way.

He is saying that your new net pay after pension contributions is 4% less than the old net pay - i.e. 4% of the gross salary, £960.

You are saying that one net pay is 5.13% less than the other.

Dunstonh is quoting the industry standard - i.e. a 5% gross contribution is actually only a 4% net contribution.

You are quoting your own standard. - i.e comparing two net pays with each other.

ffacoffipawb

jem16 wrote: »

Both you and Dunstonh are saying the same thing in a different way.

He is saying that your new net pay after pension contributions is 4% less than the old net pay - i.e. 4% of the gross salary, £960.

You are saying that one net pay is 5.13% less than the other.

Dunstonh is quoting the industry standard - i.e. a 5% gross contribution is actually only a 4% net contribution.

You are quoting your own standard. - i.e comparing two net pays with each other.

Not quite, dunstonh said:

net pay (what you take home) is actually only reduced by 4%

which is not true.

What you take home does not fall by 4%, as I have shown.

He means that 5% gross is 4% net plus 1% tax relief (which I agree with for a basic rate taxpayer), which is totally different.

dunstonh

Gross contribution on payslip of £100 would see a net take home reduction of £80 as £20 is due to tax relief.

Hence a 5% gross contribution equates to a 4% net contribution. So, someone expecting a 5% reduction isnt going to get a 5% reduction. They are going to get a 4% reduction. (salary sacrifice not included in this example).

jem16

ffacoffipawb wrote: »

Not quite, dunstonh said:

net pay (what you take home) is actually only reduced by 4%

which is not true.

It is true.

Net pay has reduced by £960 which is 4% of the gross salary.

What you take home does not fall by 4%, as I have shown.

You have shown us one way of calculating it. I have shown you another way of calculating it. Both are mathematically correct. Only one way makes sense in explaining to someone why they have paid £1200 into their pension but only £960 has come out of their actual take home pay.

He means that 5% gross is 4% net plus 1% tax relief (which I agree with for a basic rate taxpayer), which is totally different.

It's not totally different. It's actually the correct way to compare pension contributions.

ffacoffipawb

jem16 wrote: »

Net pay has reduced by £960 which is 4% of the gross salary.

Dunstonh said:

net pay (what you take home) is actually only reduced by 4%

which is false.

The reduction in Net Pay is:

Net Pay (No Pension) - Net Pay (With Pension) x 100
Net Pay (No Pension)

which is the 5.13% I calculated.

It is wrong to express it as

Net Pay (No Pension) - Net Pay (With Pension) x 100
Gross Pay

as the denominator is not Net Pay (No Pension)

You may as well say that the percentage drop is

Net Pay (No Pension) - Net Pay (With Pension) x 100
The amount of GDP lost by New Labour Incompetence

because that is just as incorrect.

Put simply if you had a and then have b, the percentage drop in a is

(a - b) x 100 / a

and not

(a - b) x 100 / c

because the denominator in the latter formula is not a.

Do you understand now?

Are there any mathematicians on this site?

Suppose tax is 85% on all income.

Suppose salary is 10,000 and if a member joins a pension scheme the contribution rate is 10%.

No pension, take home is 1,500

With pension, take home is 1,350.

Take home pay has reduced by 10% = (1500 - 1350) x 100 / 1500.

You wouldn't say that take home has reduced by (1500 - 1350) x 100 / 10000 = 1.5% would you?

This is what dunstonh said, which in this scenario is

net pay (what you take home) is actually only reduced by 1.5%

See?

If you can't see that, I give up.

Lokolo

ffa - Do you know the difference between Net Pay and Gross Pay?

I am also confused as to why you are making up different tax rates, and how someone on £10k can suddenly take home £1500 a month.

Racheldevon

I seem to have opened a can of worms! I'm wondering if I need to check the % with my employer, as my net salary is higher than the amount that's been worked out here, i'm sure I selected 5%, but i'm now wondering if there's an error somewhere

Lokolo

Racheldevon wrote: »

I seem to have opened a can of worms! I'm wondering if I need to check the % with my employer, as my net salary is higher than the amount that's been worked out here, i'm sure I selected 5%, but i'm now wondering if there's an error somewhere

If you give us all the numbers on your payslip so; gross income, pension contributions, NI, tax, net pay and tax code, we can work out if it's right and the %s.

jem16

ffacoffipawb wrote: »

Dunstonh said:

net pay (what you take home) is actually only reduced by 4%

which is false.

No it isn't. ( and saying it umpteen times dioesn't make it true either )

The reduction in Net Pay is:

Net Pay (No Pension) - Net Pay (With Pension) x 100
Net Pay (No Pension)

which is the 5.13% I calculated.

Nobody is denying what you are saying. Again doesn't make it correct.

Suppose tax is 85% on all income.

Which would mean you get 85% tax relief.

Suppose salary is 10,000 and if a member joins a pension scheme the contribution rate is 10%.

No pension, take home is 1,500

With pension, take home is 1,350.

So far so good.

Take home pay has reduced by 10% = (1500 - 1350) x 100 / 1500.

You wouldn't say that take home has reduced by (1500 - 1350) x 100 / 10000 = 1.5% would you?

Of course you would. Take home pay has reduced by £150 which is 1.5% of £10,000. Just the same as an 85% tax rate would would mean that you would pay 15% of 10% pension contribution which is exactly 1.5%.

This is what dunstonh said, which in this scenario is

net pay (what you take home) is actually only reduced by 1.5%

See?

Yep absolutley correct as i have shown.

If you can't see that, I give up.

I think you had best give up.

Pension contributions ( in the case of most company pensions ) are paid gross. Tax relief is paid on gross contributions. Your net pay reduction is based on gross figures.

We have no doubt that your net pay comparisons are perfectly mathematically correct and if that's the way you want to think about it then great.

However to make sense of what is happening and to make sure figures paid into a pension are correct you have to look at the gross figures.

jem16

Lokolo wrote: »

I am also confused as to why you are making up different tax rates, and how someone on £10k can suddenly take home £1500 a month.

He's quoting yearly figures, not monthly figures.

He also seems to think that by changing the tax figures that it's going to make my figures wrong.