Salary Sacrifice, 42% saving, 25% tax free cash, 86% of contributions back

gadgetmind

Zero_Sum wrote: »

employers rate is normally 13.8%, because I'm in the pension scheme my emplorers NIC is reduced to 10.4%

and also I get a 1.4% discount on my NIC's

I'm afraid that I can make neither head nor tail of that. Can you show some worked numbers?

Zero_Sum

gadgetmind wrote: »

I'm afraid that I can make neither head nor tail of that. Can you show some worked numbers?

its not difficult.

if I'm in the scheme, I save 1.4% on NIC's, my employer saves 3.4%

xylophone

I'm afraid that I can make neither head nor tail of that. Can you show some worked numbers?

http://www.unitetheunion.org/resources/pensions/salary_sacrifice.aspx

gadgetmind

Zero_Sum wrote: »

if I'm in the scheme, I save 1.4% on NIC's, my employer saves 3.4%

Yes, but how are those number derived?

hugheskevi

It is just a standard contracted-out scheme, and the figures (1.4% employee, 3.4% employer) are the contracted-out rebate.

Contracting-out is different to salary sacrifice (the contracted-out rebate reflecting the foregone State Second Pension) so it is rather talking at cross-purposes. A contracted-out scheme could also be a salary sacrifice scheme, or not, as the employer chooses.

Zero_Sum

gadgetmind wrote: »

Yes, but how are those number derived?

they're set by the HMRC

gadgetmind

hugheskevi wrote: »

A contracted-out scheme could also be a salary sacrifice scheme, or not, as the employer chooses.

I've contracted out, and I've done sal sac, but didn't know they could be combined. I guess this doesn't apply to personal pensions?

hugheskevi

I've contracted out, and I've done sal sac, but didn't know they could be combined. I guess this doesn't apply to personal pensions?

It is extremely common for Defined Benefit schemes to be both contracted-out and operate salary sacrifice for member contribution.

Personal pensions can no longer be contracted-out so it isn't relevant for those.

A personal pension can be salary sacrifice - usually if it is part of a Group Personal Pension set up by an employer, but there is nothing stopping an individual agreeing with their employer to pay them less and put money into their individual personal pension instead, although it is only likely to be small employers who would agree to this.

For individual personal pensions with no employer involvement, sadly there is no way to avoid paying employee NICs on member contributions made using earned income (as far as I am aware).

jamesd

While there are restrictions to pensions, getting 39.53%, 55.40%, 81.81% or 105% more income for your money compared to the same investments in an ISA, even allowing for basic rate tax on the income, is a good deal from salary sacrifice. Basic rate tax payers get a bigger uplift from salary sacrifice than higher rate due to their higher employee NI contributions, so it's a particularly good deal for them.

Some numbers for salary sacrifice pension contributions.

Basic rate, no employer NI contribution: Pay in £1,000 gross, save 20% income tax, 12% employee NI. £1,000 in the pot for net initial cost of £680. Take 25% tax free lump sum if 55 or older, £250 taken out. Now have £1,000 - £250 = £750 in pension pot at a net cost of £680 - £250 = £430. £750 / £430 * 100% = 174.4% so you've made 74.4% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £750 * 80% = £600. If you'd just put the net £430 in the ISA that's all you'd have so you're better off by £600 / £430 * 100% - 100% = 39.53% higher income for your money.

Basic rate, employer adds half of their 13.8% employer NI: Pay in £1,000 gross, save 20% income tax, 12% employee NI. Employer adds 6.9% from their employer NI to the pot giving you £1,069 in the pot for net initial cost of £680. Take 25% tax free lump sum if 55 or older, £267.25 taken out. Now have £1,069 - £267.25 = £801.75 in pension pot at a net cost of £680 - £267.25 = £412.75. £801.75 / £412.75 * 100% = 194% so you've made 94% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £801.75 * 80% = £641.40. If you'd just put the net £430 in the ISA that's all you'd have so you're better off by £641.40 / £412.75 * 100% - 100% = 55.40% higher income for your money.

Higher rate, no employer NI contribution: Pay in £1,000 gross, save 40% income tax, 2% employee NI. £1,000 in the pot for net initial cost of £580. Take 25% tax free lump sum if 55 or older, £250 taken out. Now have £1,000 - £250 = £750 in pension pot at a net cost of £580 - £250 = £330. £750 / £330 * 100% = 272.2% so you've made 172.2% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £750 * 80% = £600. If you'd just put the net £330 in the ISA that's all you'd have so you're better off by £600 / £330 * 100% - 100% = 81.81% higher income for your money.

Higher rate, employer adds half of their 13.8% employer NI: Pay in £1,000 gross, save 40% income tax, 2% employee NI. Employer adds 6.9% from their employer NI to the pot giving you £1,069 in the pot for net initial cost of £580. Take 25% tax free lump sum if 55 or older, £267.25 taken out. Now have £1,069 - £267.25 = £801.75 in pension pot at a net cost of £580 - £267.25 = £312.75. £801.75 / £312.75 * 100% = 256% so you've made 156% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £801.75 * 80% = £641.40. If you'd just put the net £312.75 in the ISA that's all you'd have so you're better off by £641.40 / £312.75 * 100% - 100% = 105% higher income for your money.

ffacoffipawb

jamesd wrote: »

While there are restrictions to pensions, getting 39.53%, 55.40%, 81.81% or 105% more income for your money compared to the same investments in an ISA, even allowing for basic rate tax on the income, is a good deal from salary sacrifice. Basic rate tax payers get a bigger uplift from salary sacrifice than higher rate due tot heir higher employee NI contributions, so it's a particularly good deal for them.

Some numbers for salary sacrifice pension contributions.

Basic rate, no employer NI contribution: Pay in £1,000 gross, save 20% income tax, 12% employee NI. £1,000 in the pot for net initial cost of £680. Take 25% tax free lump sum if 55 or older, £250 taken out. Now have £1,000 - £250 = £750 in pension pot at a net cost of £680 - £250 = £430. £750 / £430 * 100% = 174.4% so you've made 74.4% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £750 * 80% = £600. If you'd just put the net £430 in the ISA that's all you'd have so you're better off by £600 / £430 * 100% - 100% = 39.53% higher income for your money.

Basic rate, employer adds half of their 13.8% employer NI: Pay in £1,000 gross, save 20% income tax, 12% employee NI. Employer adds 6.9% from their employer NI to the pot giving you £1,069 in the pot for net initial cost of £680. Take 25% tax free lump sum if 55 or older, £267.25 taken out. Now have £1,069 - £267.25 = £801.75 in pension pot at a net cost of £680 - £267.25 = £412.75. £801.75 / £412.75 * 100% = 194% so you've made 94% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £801.75 * 80% = £641.40. If you'd just put the net £430 in the ISA that's all you'd have so you're better off by £641.40 / £412.75 * 100% - 100% = 55.40% higher income for your money.

Higher rate, no employer NI contribution: Pay in £1,000 gross, save 40% income tax, 2% employee NI. £1,000 in the pot for net initial cost of £580. Take 25% tax free lump sum if 55 or older, £250 taken out. Now have £1,000 - £250 = £750 in pension pot at a net cost of £580 - £250 = £330. £750 / £330 * 100% = 272.2% so you've made 172.2% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £750 * 80% = £600. If you'd just put the net £330 in the ISA that's all you'd have so you're better off by £600 / £330 * 100% - 100% = 81.81% higher income for your money.

Higher rate, employer adds half of their 13.8% employer NI: Pay in £1,000 gross, save 40% income tax, 2% employee NI. Employer adds 6.9% from their employer NI to the pot giving you £1,069 in the pot for net initial cost of £580. Take 25% tax free lump sum if 55 or older, £267.25 taken out. Now have £1,069 - £267.25 = £801.75 in pension pot at a net cost of £580 - £267.25 = £312.75. £801.75 / £312.75 * 100% = 256% so you've made 156% on your money from the tax relief. But this income is taxable and probably at basic rate so ISA-equivalent for income generation is £801.75 * 80% = £641.40. If you'd just put the net £312.75 in the ISA that's all you'd have so you're better off by £641.40 / £312.75 * 100% - 100% = 105% higher income for your money.

A decrease of £1 in income can increase child tax credits by 41p so that makes the salary sacrifice even more compelling.