Calculations help requested - company removing scheme

BettySwollocks_2

I'm posting under a rarely used name, since I'm a bit too identifiable with my usual name, and this is a sensitive issue at work.

And apologies for the length...

My company is abandoning a little used salary sacrifice scheme to which few employees joined and 'replaced' it with a glitzy new scheme well advertised to all within the company which is (in my opinion) vastly inferior. I'm trying to work out exactly how much worse off I am.

While the details I give here will not be exactly the same as my situation, I hope to provide sufficient information for anyone knowledgeable about such things to help me.

Right... The old scheme is bog standard Salary Sacrifice, with the company adding what they'd normally pay in employers National Insurance which is 13.8% of the amount sacrificed. The usual 'revenue neutral' option.

New 'scheme' - well technically there isn't one that matters here. Everyone gets it - I'd still be getting it if the old scheme carried on, since it's actually a cunningly disguised pay rise that was 6 months late, and since it's deemed to be salary sacrifice, the company doesn't pay any NI on it. I'm discounting this scheme since it balances out either way.

Now I've two methods of working out by how much I'm worse off (by trying to calculate how much my gross pay would need to increase to keep me in my current position), but while it feels they're working out the same thing, I'm getting vastly different answers - can anyone work out what I'm doing wrong with either (or both!), or whether they're actually measuring different things?

First the 'facts'. These are representative, but not the actual figures I have to hand.

Pre-sacrifice gross salary: £50,000 pa
Sacrifice: £10,000 pa
Tax code: 810L
I shall be using 2012/2013 HMRC limits.

Calculation 1

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In general for every £100 earned, £12[1] is taken in National Insurance, and either £20, £40 or £50[2] is taken in Income tax, leaving £68, £48 or £38 net pay.

Additionally, the employer must also hand over to HMRC £13.80.[1]

When sacrificing that £100, with the old scheme, none of the tax/NI is taken off, and the employer's NI is not due - the employer 'donates' that to the same pension fund the sacrifice goes to

So, for each £100 sacrificed, £13.80 is added to our remuneration, therefore £113.80 is added to the pension fund.

With the new scheme, the employer's NI does not feature in the calculations at all, and any post-tax income contributed to a personal fund does not attract 'NI relief' - i.e. employee's NI is also lost.

In order for a 40% rate payer to continue to have £113.80 added to their fund, they must give up (£113.80*0.6) £68.28 of their net pay receiving 20% rebate immediately and add the 20% rebate they get at the end of the tax year long after the tax was paid.
This is (£68.28-£48) £20.28 extra per £100 into the fund that must be forfeited from net pay over the salary sacrifice scheme.

In order for a 20% rate payer to continue to have £113.80 added to their fund, they must give up (£113.80*0.8) £91.04 of their net pay.
This is (£91.04-£68) £23.04 extra per £100 into the fund that must be forfeited from net pay over the salary sacrifice scheme.

Since I am sacrificing £10,000 per year, this means (since some is 20% and 40%) I am losing out between (£20.28*100)£2,028 and (£23.04*120)£2,304 of net (i.e. after tax) pay per year.

This works out to an equivalent gross salary detriment of between (£2028*100/(100-40-12))£4225 and (£2304*100/(100-20-12))£3389

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Calculation 2

Alternatively, another way of viewing it, I am currently sacrificing £6046.60[3] of my net pay to gain a £11,380 contribution to my pension pot.

In order to retain that £11,380 contribution I shall need to contribute out of my net pay:
£4,515 to rebate the £3010 40% rate tax for a total contribution of £7,525
The remaining gross contribution of (£11380 - £7525)£3855 requires a net (20% rate) contribution of £3084
So total reduction of post-tax income is (£4515+£3085)£7,599
The difference between the two schemes is (£7599-£6046.60)£1554.40
Grossing up to add the tax and NI that would produce that net figure we get (£1554.40*100/(100-40-12))£3,238

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Clearly the two calculations come up with different numbers (the difference is worse with the real numbers, but the above demonstrates the issue).

Have I gone wrong in one, or both, or are they calculating different things?

If you got this far, thanks for reading.

[1] www-hmrc-gov-uk/rates/nic.htm
[2] www-hmrc-gov-uk/rates/it.htm
[3] The difference in net pay between the taxed gross pay of pre-sacrifice £50,000 and post-sacrifice £40,000 on a tax code of 810L from www-listentotaxman-com/index.php

jamesd

BettySwollocks wrote: »

In order for a 40% rate payer to continue to have £113.80 added to their fund, they must give up (£113.80*0.6) £68.28 of their net pay receiving 20% rebate immediately and add the 20% rebate they get at the end of the tax year long after the tax was paid.

This is (£68.28-£48) £20.28 extra per £100 into the fund that must be forfeited from net pay over the salary sacrifice scheme.

That net pay isn't quite fair because there is the tax relief and HMRC will adjust a tax code to let you get the tax relief throughout the year if you tell them your estimated non-sacrifice pension contributions.

For a higher rate tax payer this salary sacrifice works like this:

£1000 of gross pay into pension. Employee NI of 2% and employer NI of 13.80% added so total into pension is 1.158 * £1000 = £1158. Net cost to employee is £600. So the employee gets 1158/600 = 1.93 times their net cost going into the pension.

Without salary sacrifice, if pension contributions are taken from gross pay:

£1000 of gross pay into pension. £1000 into pension, no other adjustment. No NI adjustment, so pay employee NI on the 1000 at 2%, £20. HMRC adjusts tax code for the pension contribution amount (it raises the basic rate band). Net cost to employee is £600 + £20 = £620. Employee gets 1000 / 620 = 1.6129 times their net cost going into the pension. In addition the company has a cost of £130 for the NI they don't save.

Without salary sacrifice if pension contributions are taken from net pay:

£800 of net pay into pension, 25% basic rate relief takes this up to £1000. HMRC adjusts tax code to give £200 of the £800 back each month if you tell them that you're making 1000 gross pension contribution. Net cost to employee is £600 + £20 = £620. Employee gets 1.6129 times their net cost going into the pension and the company has a cost of £130 in NI.

The extra cost for the higher rate tax payer is 1.93 / 1.6129 -1 = 19.66% of the money going into the pension.

BettySwollocks_2

jamesd wrote: »

No NI adjustment, so pay employee NI on the 1000 at 2%, £20

I think that's the bit where I might be going wrong - I was assuming 12%:

Me wrote:

This works out to an equivalent gross salary detriment of between (£2028*100/(100-40-12))£4225 and (£2304*100/(100-20-12))£3389

Though for this example I did round both the salary (up) and contribution(down) to the nearest 10K.


Thanks James.