salary pension exchange?

castortroy31

Hi all,

just started a new job and although the company are not putting in any money for me for a pension scheme they have offered one which i am automatically enrolled into.

As a part of that , they have offered me a salary exchange pension programme.

now my understanding of that is that is I pay money from my gross into the pension scheme this can actually increase my net pay? This is done by me paying less into my NI?

i do pay quite a large proportion of tax right now since I am earning over 50k a year but I would like to increase my net pay. i do understand this could affect my state pension (if i ever get one).

can anyone explain to me how this works and is it beneficial?

I am looking to increase my net pay by 500 ish pcm and i also pay student loan at the moment.

Thanks guys,

Cas

zagfles

How exactly do you think it'll increase your net pay? Do you think your marginal deduction rate is over 100%? It can be for some people, but in unusual circumstances, for instance if you have lots of kids. What are your circumstances?

Normally you'd get 40% tax relief, 2% NI relief, and probably 9% student loan repayments relief if you join the scheme. That won't increase your net pay, but it would mean you can put £100 into your pension at a cost of £49 (though of course it'll take longer to pay your loan off so may cost you more). It won't affect your state pension as long as you don't put loads in, income over about £40K doesn't get you any more S2P.

jamesd

A salary sacrifice scheme can increase the net pay you get if you keep the total amount going into the pension pot the same. This is because of the saved NI.

Say you were paying £100 into the pension pot. Without salary sacrifice you would have to pay in £80 of after tax and NI money and get £20 back from HMRC in a lower tax code. You'd pay 2% employee NI before getting the £80, so the net cost with NI is about £61.60. (£80 + 2% minus the £20 tax refund). Not quite the right calculation but it's good enough as an illustration.

With salary sacrifice you'd sacrifice £86.36 of gross pay and end up with £100 in the pension pot if you got your personal 2% of NI saving and 13.8% employer NI. Real cost to you is now just the net after tax on £86.36 which is £51.81. So an increase in net pay of £61.60 - £51.81 for the same amount going into the pension pot.

There is no possibility of salary sacrifice being able to increase your net pay by £500 a month. Employee NI is 2% in the higher rate region and employer NI is 13.8% for a total of 15.8%. For you to save £500 in NI you'd need to be paying in pension contributions of £500 / 0.138 = £3,623. It's also possible that you will not get all of the employer NI saving, half is more likely.

For higher rate tax payers who do not take their gross pay after salary sacrifice into roughly the basic rate band there is no reduction in additional state pension from using salary sacrifice. This is because the amount of additional state pension you get only increases until your income reaches the Upper Accrual Point. The Upper Accrual Point is £770 a week, which is £40,040 for a person who has their income evenly distributed throughout a year. So someone can reduce their gross pay to that level and suffer no loss of state pension benefit. For those who would suffer a reduction, the expected reduction is lower in value than the expected benefit from the saved NI.

Salary sacrifice is the best way to make pension contributions, so this is still a good idea.

somethingcorporate

It may increase your net pay (relatively) as a % of your gross pay but in absolute terms it does not make sense (as per post 2).

castortroy31

Hi All,

thanks all much appreciated for the responses.

the reason why i entertained the idea is that I just though I was paying too much tax, I just started a new job. For my first pay check I was paying 2100 in tax, NI and Paye,. I spoke to the pension provider today and they told me that it is only 2 percent and I would only make less than 500 pounds for the whole year on the amount I wanted to put in.

Thanks everyone.
Cas