salary sacrifice pension

armour

I'm trying to get my head around salary sacrifice as it relates to me.

My particular situation is that I earn £34000 from my job and will have a further £14000 income from property (profit before tax) next year.
If I sacrifice £5000 (from my salary) into a pension I will save
£5000 x (40% + 12%) =£2600. I.E. I would be giving up £2600 of after tax income for a contribution of £5000 to my pension pot.
Is this correct or have I got something wrong here?

Zero_Sum

the £2,600 is what you effectively get back in tax, so it'll only cost you £2,400.

Mind there has been talk that the tax rebate for higher rate payers maybe reduced to 20% sometime in the future.

armour

Thanks for correcting my maths, it seems too good to be true.

For £48, I get £100 in a pension pot which I can take £25 of as a tax free lump sum, leaving £75 in the pot which has effectively cost me £23.

Zero_Sum

armour wrote: »

Thanks for correcting my maths, it seems too good to be true.

For £48, I get £100 in a pension pot which I can take £25 of as a tax free lump sum, leaving £75 in the pot which has effectively cost me £23.

Don't forget that £75 is taxable, so it'll really be £60.

Sstripey

Good news all round, still! Paying in a lump sum shortly before taking benefits can also turn out very well.

bigadaj

Isn't the ni on higher rate tax only 2%?

However as your salary will only be taxed at basic rate then won't relief be 20% plus 12%?

But when filing in a self assessment form then the profit on the property will only be taxed at standard rather than higher rate?

Zero_Sum

bigadaj wrote: »

Isn't the ni on higher rate tax only 2%?

However as your salary will only be taxed at basic rate then won't relief be 20% plus 12%?

But when filing in a self assessment form then the profit on the property will only be taxed at standard rather than higher rate?

normally yes. However its the non-NI'able income thats bringing him into the 40% band. But as far as his salary is concerned it'll be 12% on the £34k, with him having a new tax code for the house rental income. (I think it'll work like that anyway)

grey_gym_sock

this is a sweet spot for using salary sacrifice. 52% effective tax relief, when you usually only get 32% (if on basic rate) or 42% (if on higher rate).

(there's a 62% sweet spot with income just over £100k, where you can avoid losing personal allowance by making pension contributions.)

armour

Thanks for your comments guys, I'l get on to my pensions dept tomorrow & find out the nitty gritty.

armour

Good news from my pensions dept. Apparantly, no matter how much I sacrifice, they will base their pension contribution (5%) on the pre-sacrifice figure. Also, I'll be able to vary the sacrificed amount month-by-month, which will be handy to keep just out of the 40% tax bracket.
As it's a new scheme, starting in April of next year, I've also asked if they will consider rebating some (or all) of the 13.8% saving they'll be making in employer's NICs on the sacrificed amount back into my pension.

kidmugsy

armour wrote: »

I've also asked if they will consider rebating some (or all) of the 13.8% saving they'll be making in employer's NICs on the sacrificed amount back into my pension.

The way to persuade them might be to suggest that if they hand over part of the 13.8%, more people might take up salary sacrifice, so that the employer reduces his outgoings more than if he pockets the whole 13.8% himself.