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salary sacrifice pension or ISA?

I've read through the long running Pension vs ISA debate, but does being able to salary sacrifice significantly tilt the table?

I have a choice this year of contributing up to 20% via salary sacrifice (up from a previous limit of 10%), with company offering no matched contribution but adding 10% of my contribution ie most of their NI saving.

I'm 35, have around £65k in pension pot at the moment, just over higher rate tax threshold (but using childcare vouchers and pension SS to keep below it) and stuck in trying to decide if I should

a) go for maximum 20% SS, most of which would get only lower rate tax relief, but also benefit from NI and employer 10% uplift. I wouldn;t then have enough surplus to fill my and my wife's Isa allowance (c. £23.5k)

b) go for minimum SS to keep me below tax higher rate threshold (c. 5%) and then aim to fill up both our ISAs

So would you knowledgeable guys say pension or Isa, then pension?
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Comments

  • Lokolo
    Lokolo Posts: 20,861 Forumite
    Part of the Furniture 10,000 Posts
    Its up to you the amount you choose, but;

    £100 can be used:

    £110 in pension (£100 + 10% uplift)
    or
    £68 in cash (£100 - 20% Income Tax - 12% NI)
  • sterlingstash
    sterlingstash Posts: 175 Forumite
    edited 15 January 2014 at 2:39PM
    Thanks Lokolo - that is how I've always seen it and hence always maxed out pension contributions as a no-brainer.

    My other complicating factor is that in the next few years it will be harder to avoid higher rate tax with the phasing out of childcare vouchers and (hopefully) an increasing salary. So whilst most of my pension contribution at the moment only has basic rate tax relief, more of it will become higher rate in 2015/16. Articles I've read suggest it is better to save outside a pension then dump savings in at higher rate relief, so I am just wondering if I need to start to be a bit smarter with when and how much I am putting in.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    So whilst most of my pension contribution at the moment only has basic rate tax relief, more of it will become higher rate in 2015/16.

    Even if the tax relief for higher rate payers were reduced to 30%, you'd presumably still get 2% (NI) + 30% + 10% (employer's NI) with is identical to your present relief. If that reduction doesn't happen, you gain by waiting. The only obvious things that might go wrong are (i) Employer withdraws 10% offer, or (ii) Govt stops salary sacrifice.

    It may be a gamble worth taking.
    Free the dunston one next time too.
  • Thanks Kidmugsy. I was stuck before even thinking about the rules potentially changing...!
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    In your shoes I think I'd put enough to pensions to avoid the 40% tax band and stick any excess in ISAs. (I like Cash ISAs since you get your pennies of interest and can then transfer the whole caboodle to an S&S ISA when you want to buy shares or bonds.)

    In other words "go for minimum to keep me below tax higher rate threshold (c. 5%) and then aim to fill up both our ISAs".

    Then contribute more to pensions "in the next few years it will be harder to avoid higher rate tax with the phasing out of childcare vouchers and (hopefully) an increasing salary. So whilst most of my pension contribution at the moment only has basic rate tax relief, more of it will become higher rate in 2015/16."

    It's a gamble, of course, but a perfectly rational one. It also errs on the side of flexibility, which I always find attractive.
    Free the dunston one next time too.
  • That sounds very logical Kidmugsy.

    And I think Cash Isa might well be a good home while waiting for all the S&S brokers reveal their fees.
  • atush
    atush Posts: 18,731 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Pension, no brainer with salary sacrifice.
  • mania112
    mania112 Posts: 1,981 Forumite
    Part of the Furniture Combo Breaker
    Lokolo wrote: »
    Its up to you the amount you choose, but;

    £100 can be used:

    £110 in pension (£100 + 10% uplift)
    or
    £68 in cash (£100 - 20% Income Tax - 12% NI)

    This calculation is a bit messy (where's the 5% going into a pension along with the ISA in option B, and where's the tax payable on the way out?)

    But, yes, the maxed out SS is the better option, just not by as big a margin as this shows.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    I don't think it's open-and-shut that he should rush the pension contributions. (i) At present the rebates (after HRT is avoided) are 20% + 12% + 10% = 42%. (ii) In a couple of years time they are expected to be 40% + 2% + 10% = 52%. Now, if the OP feels flush, and expects to find it easy to contribute on an HRT-avoiding scale in 15-16 onwards, I see there is good reason to take up both of those offers (i) and (ii). But suppose that he might find things tight in 15-16, even with pay rises having happened? If he has declined offer (i) and socked the money away in ISAs, he can now withdraw it and contribute it to offer (ii). I like that sort of flexibility. Of course his position might imply that the price of the flexibility comes too high (in the sense of the opportunity cost of forgoing (i)), but we none of us commenting here know about that.

    Why might things get tight? Dunno, but mortgage interest rates might rise, his wife's earnings might decline, unexpected expenditures might crop up … all sorts of things might happen.
    Free the dunston one next time too.
  • opinions4u
    opinions4u Posts: 19,411 Forumite
    edited 16 January 2014 at 2:21PM
    Lokolo wrote: »
    Its up to you the amount you choose, but;

    £100 can be used:

    £110 in pension (£100 + 10% uplift)
    or
    £68 in cash (£100 - 20% Income Tax - 12% NI)
    Don't forget the pension will be subject to income tax when it's taken, if income is over and above the tax allowance. Other than cash lump sum.
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