To salary sacrifice or to not salary sacrifice...

Andyed201

I have just recieved the application forms for my new employers pension scheme which is a scheme I contribute 10% and they match it, but have a slight confusion with it, if anyone can help.

I have the option to do "pay exchange" which is the system of sacrificing salary so it is paid directly into the pension, saving the NI contributions. This seems like a good idea, but reduces my salary by 10%.

I also have the option of making an 8% contribution from my net which is made up by the tax relief to 10% of salary, which the company matches. I can then also claim the other 20% as a HRT.

First question - do I end up with more in the pension pot due to the salary sacrifice being gross? Not being a financial wiz, my back of the fag packet calculations make the gross sacrifice massively better than net, even with the 20% tax relief and other 20%

Second question, in the long term because of potential pay increase based on %, would I be better off with the 8% net contribution because of the effect of a lower salary when I do the sacrifice method? I have at least 25 years until I retire, so there is a lot of time for % increases to have an effect.

Any better knowledge than mine much appreciated!

ozzage

Salary sacrifice!

You save NI (do they also give you some of their employer NI saving? Worth asking!)

You don't have to faff about getting the extra 20% relief as a HRT as it's already included by the virtue of the fact that you're never taxed at all on the money.

The only possible positive of the other way is if you need the higher "official" salary figure in order to qualify for a mortgage or something.

I'm sure others more knowledgeable may have more info.

Andyed201

hmmm... just looked at my letters again and I am not sure if I made a faux pa with my numbers. The 8% contribution is calculated from "pensionable pay" and is taken from "net pay". Is pensionable pay the gross amount, and then the pension contribution is taken form the after tax amount? That would make the numbers closer.

One other point in response to above, I cant find anywhere in the scheme any information that the employer would share their NI saving with me, so I wouldn't get that benefit from salary sacrifice.

bilbo51

first question - do i end up with more in the pension pot due to the salary sacrifice being gross?

It depends. What do you do with the higher rate tax refund that you (presumably) reclaim on your tax return? If you pay it into your pension then the result will be the same, except there is a time lag between paying and reclaiming the higher rate tax. If you just pocket it, then salary sacrifice will mean that the money which now goes into your pocket will in future go into your pension every month. In that case you'll get more in your pension. You might get even more if the company is prepared to let you have some of their NI savings (this NI saving is the financial justification for companies to set up salary sacrifice schemes.)

Example: I'm a higher rate taxpayer and am currently paying 14% of gross salary (all in the 40% tax band) into the pension via salary sacrifice. This saves me some NI. It also saves the company some NI and they kindly give me back some of their NI savings. This equates to 1% of my salary sacrifice. They also pay 10% of my salary as their contribution. So in total there's 25% of my gross salary going into my pension. This costs me 14% of gross salary, which after tax (ignore the NI) costs me 8.4% of take home pay. Bargain.

I don't follow your second question I'm afraid.

EDIT - I started this before your second post and didn't see that until I had posted...

bilbo51

Your pensionable salary is usually the gross amount of your basic salary. ie it doesn't include bonuses, on-call allowances, overtime etc...

FatherAbraham

ozzage wrote: »

Salary sacrifice!

...

The only possible positive of the other way is if you need the higher "official" salary figure in order to qualify for a mortgage or something.

That's not really comprehensive advice.

Taking SS can impact negatively on redundancy pay, unless there's special provision made in the agreement.

Warmest regards,
FA

rpc

ozzage wrote: »

The only possible positive of the other way is if you need the higher "official" salary figure in order to qualify for a mortgage or something.

All statutory benefits are worked on on the post-sacrifice salary. Tax credits, maternity pay, etc can all be affected.

mania112

Points to consider:

Tax position is neutral. Furthermore, it's tax-relief at source - so this means you'll get the benefit in your pay rather than in the pension. This could be positive or negative depending on your perception.

You and your employer save NIC's. This is good UNLESS you're close to lower thresholds (which I assume you're not)... this explains why employers are interested in this too, if you were wondering!

It may affect death in service, because your salary is basically less (minus the pension contribution) but i've seen examples of firms offering a 'default' salary which is the same as you would have been paid and can be used as a benchmark for death in service and/or other insurances.

There are then various reasons having a lower salary can affect you:

- applying for a mortgage
- applying for state benefits (maternity pay for eg)

Generally speaking its a good idea, it's a form of tax avoidance, but a perfectly legitimate one (for now), so if you don't have concerns about the morals of it, it should be fine for you.

xylophone

http://www.friendslife.co.uk/doclib/mpen15d.pdf
might be worth a look.

ozzage

FatherAbraham wrote: »

That's not really comprehensive advice.

Absolutely! Thanks to you and the other later posters for adding more details.

Andyed201

Thanks everyone.

Just to reply to a few things/clarify a few things;
1. The second question related to future pay. If I earn 60k, do 10% salary sacrifice, I get 54k. Then if I get 10% pay increase, I go to 59.4k, but if I had been on the 60k I would have gone to 66k, so the gap grows. With a long career left, that gap would keep growing. I was trying to work out if that was something I should consider?
2. I don't get any benefits, credits etc etc at all, so they aren't impacted by the choice
3. Mortgage is sorted and we never plan to move again. Re mortgage won't be an issue on the lower salary if I do the sacrifice, so that isn't a big issue.
4. On the HRT claim, I have never claimed before this year, so am used to paying the tax and therefore it going in my pension wouldn't be a loss to what I see in my pocket. Note I have claimed for back years as well, as I saw that on another forum!

So it looks to me that the salary sacrifice is a good idea, which will save me some tax and increase the money in my pension pot.

Thanks everyone.