Salary Sacrifice help

Barca9

Hi

I'm trying to work out if I should opt out or allow myself to be auto-enrolled in a new salary sacrifice pension arrangement that my employer is switching to shortly.

I've tried a few online calculators (most seem to be aimed at advisors or don't quite do what I expected) and am pretty sure the net position will be fairly neutral for me, but would like a second opinion..

Current arrangement: gross salary of £45.5k and employee pension contribution of 11%, employer contribution 6%, my contribution deducted after tax, tax code 1064L (this includes an allowance for the additional "higher rate" tax relief - amounting to around £2.1k tax free amount in my PAYE code based on anticipated employee pension contributions of £4.2k for this tax year). I only recently increased my contributions to 11% which is why £4.2k isn't exactly 11% of my salary in case that's important...

The new salary sacrifice arrangement will effectively reduce my salary by around £5k pa, equating to 11% of gross pay. Employer contribution will stay at 6% and they are NOT passing on any of the employer NI savings they will realise under sal sac.

Under sal sac I will no longer be claiming for higher rate tax relief via my PAYE code and there will also be no basic rate relief paid into my pension either; effectively I would receive the whole tax benefit in my net pay / payslip (as I understand it), so should re-invest that element into my pension to maintain parity.

As the higher rate tax relief would no longer apply, to make sure any pre / post "net pay" calculations are like for like, I have to adjust my current tax code of 1064L to around 854L don't I?

I haven't yet bottomed out the other sal sac issues to be wary of (such as what my pension life insurance multiplier will be based on under sal sac - "pre-adjusted" salary or the lower amount etc...), but believe I won't lose out in that regard; all benefits should be pegged to the higher "reference" amount.

Is there enough info here for someone to assist / reassure me? My conclusion is that it probably isn't worth joining the sal sac scheme as it stands.

Thanks in advance!

John

Daniel54

Your salary sacrifice contributions are made from gross pay,not net.So your 11% contribution is free of income tax and NI.

You will pay income tax and NI only on your salary after the pension contribution.

With salary sacrifice you get more into your pension as the NI you would have paid under your current arrangement is now sacrificed into the pension

jamesd

You get both basic and higher rate income tax relief each month automatically because neither is deducted from the value of your contribution first. There is no pension-related adjustment to your tax code because none is needed, the lower taxable pay does all that is required.

FatherAbraham

Barca9 wrote: »

Current arrangement: gross salary of £45.5k and employee pension contribution of 11%, employer contribution 6% ...

Going salary sacrifice is tax-neutral, but you get the higher-rate relief immediately, instead of having to claim it back after the tax year (except, you're currently get yours early because of the tax-code adjustment). There's no need to "settle up" with HMRC.

Going salary-sacrifice is NI-advantageous. NI is 12% up to £41-thousand-and-something, then 2% above that -- so most of your 11% contrib on £45k is costing you NI at 2%, a bit is being NIed at 12%. You can avoid all that NI by going salary sacrifice.

If in doubt, go salary sacrifice. It's National Insurance who loses out.

The 2% NI is just a tax for you anyway, because it's above the limit for accumulating S2P bennies, which in any case are probably vanishing in the 2016 reform.

Why on Earth would you not go salary sacrifice? Indeed, there's even an incentive to increase your contribs further, since all your increased contribs will avoid the 12% NI charge.

Warmest regards,
FA

Barca9

Thanks for the replies - my reference to adjusting the PAYE code was to related to the fact that I currently receive relief via PAYE coding that I won't have under sal sac, hence my code will "drop" (I was trying to establish what my net pay would actually be before / after, and whether it would be neutral).

Good point about additional contributions FA.

Is there a calculator you recommend that I can play around with (current net pay vs sal sac?).

One final point I neglected to mention - I get a car allowance of £6.5k gross pa on top. Is this a significant factor in respect of what we've discussed?

Thanks again.

Daniel54

The simple answer is that your net pay will be the same -so neutral.

jem16

Barca9 wrote: »

Thanks for the replies - my reference to adjusting the PAYE code was to related to the fact that I currently receive relief via PAYE coding that I won't have under sal sac, hence my code will "drop" (I was trying to establish what my net pay would actually be before / after, and whether it would be neutral).

It should be slightly higher with Salary Sacrifice as you will save NI on the £5005 contribution.

One final point I neglected to mention - I get a car allowance of £6.5k gross pa on top. Is this a significant factor in respect of what we've discussed?

Thanks again.

Yes it means the NI saving will be all at 2% as opposed to some at 2% and some at 12%.

Barca9

Thanks for taking the time to reply. Appreciated.

FatherAbraham

Daniel54 wrote: »

The simple answer is that your net pay will be the same -so neutral.

No, net pay will be higher, because there's less gross pay to pay National Insurance on.

Warmest regards,
FA