Salary Sacrifice Mathematicians please

westy22

I hope someone can help me with the maths, please.

I am a HR taxpayer but only earn £7,500 pa under PAYE - the rest of my income is dividends and pensions. I am over 55 but do not intend taking any further pension for the next 5 years.

My employer has had an excellent year and has generously offered me one of 3 options :j:

1. a bonus of £7,000 - this would be subject to HR tax and NI, of course. I would then contribute the net amount to my SIPP and get a 25% HMRC uplift and then claim back the additional 20% as an increase to my personal allowance.

2. an employer contribution of £7,500 to my SIPP - saves them CT and they are adding an extra £500 of their NI saving.

3. a payment of £7,500 to my SIPP done under a salary sacrifice arrangement.

Whichever option I choose I want the money to go into my SIPP so it is a case of which would be the best for me. I thought that options 2 and 3 would work out the same but I could be wrong.

None of the options will bring me out of HR tax banding so at least that doesn't complicate matters

I think that option 2 is best for me but any help would be appreciated as the maths is driving me mad.

gadgetmind

You might struggle with sal sac as you can't sacrifice so as to go under minimum wage.

Option 2 looks easiest to me.

jamesd

Option 2 looks best. The minimum wage issue for salary sacrifice is significant sometimes and unless you're working only a few hours may affect you. They aren't allowed to let you use salary sacrifice to take you below minimum wage.

Since you're over 55 you should also consider taking pension income and recycling it into more pension contributions. That'll be neutral for income tax initially but you'll get ahead by getting a second tax free lump sum from the new contributions. So it's better than just leaving the money in the pension unless you've one of the protections to get you a higher lifetime allowance in place. I'm also assuming that you're not in Flexible Drawdown and barred from making more pension contributions for that reason.

westy22

I'm also assuming that you're not in Flexible Drawdown and barred from making more pension contributions for that reason.

Thanks, jamesd. Your assumption is correct- my in-payment pension is a Services pension and I have not touched any of my SIPP or other PPs.

Since you're over 55 you should also consider taking pension income and recycling it into more pension contributions

I need to look into this in more detail. The main reason I have not crystallized any of my SIPP so far is because I currently have sufficient income from dividends and pension (I am a majority shareholder in a profitable small company). I am divorced with a teenage daughter and suspect that I will not need to ever use my SIPP so see it more as a way of leaving money to her outside of my estate. If I were to commence drawing on my SIPP the potential 55% tax charge worries me.

I suppose the problem is that I always want my cake and my half-penny!

kidmugsy

westy22 wrote: »

The main reason I have not crystallized any of my SIPP so far is ... more as a way of leaving money to her outside of my estate.

HMRC has argued (sorry, no link) that a pension that is not crystallised at a sensible time is liable to some sort of penalty because the owner is obviously involved in trying to avoid Inheritance Tax.

I have, of course, been careful to record cast iron reasons, unrelated to IHT, for not yet crystallising my surviving uncrystallised fragments.

westy22

Thanks, kidmugsy. I will need to get my creative head on and think up some good and valid reasons!

jamesd

You may find find that you can get a life assurance policy on your own life to benefit your daughter and replace the 55% tax charge at lower cost than the benefit of recycling the pension money. Depends just how much you're recycling.

westy22

jamesd. I have been reading up on income recycling as you suggested but I am not sure if I am misunderstanding something.

My Service pension; my dividends; and any income I take from crystallizing my SIPP are not 'relevant earnings' for pension purposes.

Therefore could I only recycle up to my £7,500 pa PAYE earnings back into a 'new pot'? I am already, in effect, doing this as I currently contribute up to my relevant earnings maximum into my SIPP as well as direct employer contributions which are not restricted by the relevant earnings rule.

jamesd

You're not misunderstanding. You're right about relevant earnings and if you're already using the maximum you can't do any more.