Employer Contribution v Salary Sacrifice

wary

I'm a contractor who currently uses their own LTD company. I spoke to an Umbrella company recently about the possibility of using their service instead for my next contract ... which means their company receive my gross income from the agency, make the necessary deductions etc and pay me the remainder as net salary.

On the subject of pension contributions, they say they provide this service and will make the payments into the fund, but only as salary sacrifice and not as employer contributions.

Please can someone clarify the difference, and whether one is more efficient than the other in my position, either in terms of minimising PAYE/NI liability or contribution limits.

Thanks

greenglide

But salary sacrifice effectively turns your contributions into employer contributions!

Maybe what the won't do is pay employers contributions directly into a pension scheme outside of payroll.

Salary sacrifice ought to give you full tax relief on the payments including higher rate tax and employees NI. The umbrella ought to give you the Employers NI save back as well.

The net amount to be saved is paid into the fund (no tax relief as these are employer contributions) and your gross salary is reduced by the same amount resulting in a net salary reduction by a lower amount because of the tax and NI saving.

wary

greenglide wrote: »

But salary sacrifice effectively turns your contributions into employer contributions!

Yes, that was my understanding too, and she couldn't explain the difference and why she would so adamant that they would do one but not the other.

greenglide wrote: »

Salary sacrifice ought to give you full tax relief on the payments including higher rate tax and employees NI. The umbrella ought to give you the Employers NI save back as well.

You may have hit the nail on the head there. I believe they should deduct all expenses & pension payments before calculating Employers NI. However, I’m aware that some Umbrellas calculate it on the gross income and keep the difference (effectively creaming off 13.8% of your expenses & pension payments) as additional (hidden) “employment costs”. She admitted they do calculate it on the gross, but claimed that it has to be done this way and all money goes to HMRC, something I’m rather dubious about. I’m wondering whether they feel they can better legitimise doing it that way if this money is considered salary sacrifice rather than employers contributions.