EE/ER Contributions Question

pdean52

Hi,


Apologies if I'm posting this in an incorrect area but I'm hoping someone can provide some advice else I'm going to have to seek professional opinion on this quandary!! In fact I probably will have to anyway to provide a comprehensive answer to the employee from a qualified source!


Firstly I should point out I'm inheriting this mess (along with many others) from an inept previous employee - I distance myself completely from the arrangement.


I have an employee on PAYE (who also earns income from other sources due to the nature of their role) contributing monthly to a private pension via salary sacrifice. Total contribution of £280 per month to the scheme - EE contribution is currently £109.20 (taken from their gross salary so before income tax) and thus ER contribution is £170.80 despite company policy being a match of EE contribution.


I've fedback to the employee that they either need to increase their contribution to £140 per month or we reduce the total contribution made to the scheme to £218.40.


Their argument is that they agreed to contribute £100, the company should match the contribution (another £100) and as a 40% taxpayer they get an additional 40% of the £200 added on top of the contribution.


I'm arguing that as a 40% taxpayer the initial 20% is relief at source as they've not paid any income tax and the other 20% should be claimed back via Self Assessment.


If I can provide any additional detail please let me know. I'm far from a pensions specialist but the arrangement they agreed with my predecessor does not smell right to me - being as their tax returns are handled by an accountant I'm presuming that he's most likely claiming back that additional tax relief already and is making a mint out of the current arrangement. I'm happy to stand corrected though.


Many thanks,


Paul

Linton

I am far from a pensions expert but.....

Surely as both the employers and the employees contributions (Salary Sacrifice) should be paid gross direct to the PP there is no tax to rebate.

If they were paid to the employee to contribute himself to the PP then presumably they should be taxed before being handed over and then the employee gets the 20% direct rebate to the pension and the 20% HRT rebate outside.

xylophone

I have an employee on PAYE (who also earns income from other sources due to the nature of their role)

This other income has nothing to do with your company?

Is the pension scheme to which you refer your company's pension scheme?

Was the agreement that the company would match contributions to the scheme up to a maximum of £x and the whole contribution would be by salary sacrifice from the employee's gross salary before tax?

If so, the employee is already receiving tax relief - see https://forums.moneysavingexpert.com/discussion/1650715

He is responsible for declaring his other income to HMRC and paying the tax due?

pdean52

Thanks for replies so far.......


To confirm the other sources of income are not from the same company. In fact the income earnt from the company I'm referring to falls into the 20% tax band but that's another matter!


Also to confirm this is a private pension plan - this employee is not involved in the new auto-enrolment company pension scheme.


Original agreement was that the company would match contributions to the scheme up to a maximum of £3,000 and the employee contribution would be by salary sacrifice from the employee's gross salary before tax.


I agree though on the point that any additional tax relief should be claimed back via self assessment and not used to top up the monthly contributions!


Very interesting link thank you - backs up my point that the tax relief has already been realised on the EE contribution by not being subject to income tax.

xylophone

I don't understand why your company has any knowledge of this employee's other income?

You refer to this person's pension scheme - this is his personal pension, not a scheme sponsored by your company?

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest/employer-contributions

Are you sure that this is a successful salary sacrifice?

http://www.hmrc.gov.uk/manuals/eimanual/eim42786.htm

You mention that you have found a number of administrative muddles.

Should your company be seeking advice from a qualified corporate tax accountant?

Like Linton, I am no pensions expert ......

pdean52

I don't want to disclose too many details for fear of exposing an employee's personal circumstances but let's just say this employee offers musical services to companies other than ours even though he is a salaried employee for the company for which I work.


I am a qualified management accountant but have never really been exposed to pension contributions at this kind of level. To be honest this is a HR matter for me but yet again I'm not overly confident in our HR manager's abilities so want to ensure that this problem is resolved correctly.


This is indeed a personal pension scheme that this company contributes to on the employee's behalf - contribution being made up of EE contribution (deducted at source) plus the "agreed" ER contribution.


And for clarity I have a conference call with our tax accountants tomorrow morning - this forum post was more to clarify that my way of thinking was not illogical. I am being made to feel as if I'm talking bunkum by this particular employee and am getting rather annoyed!

Judwin

It sounds to me that the EE wants to pay £100 p/m net into his pension - i.e. he's prepared to accept £100 less take home pay.






However, the maths is a bit squiffy - grossing this up doesn't add another 40%. £100 net is £166.66 for a 40% tax payer. There is also an EE National Insurance saving - NI is 2% for him so you need to account for another 2% uplift, which brings the total to £170.06.


So the EE can legitimately argue IMV that him sacrificing £100 net grosses up to £170 gross, and the company should match that. However, the deduction from gross salary should be £170 - where £109 comes from I've no idea.


Another thing is what is/was the agreement over the ER NI saving? ER NI is 13.8%. In 'giving up' £170 of gross income the employer is saving £23.46 of ER NI. Maybe whoever agreed this deal in the first place agreed to pay some/all of this saving into the EE's pension plan too?

xylophone

I am being made to feel as if I'm talking bunkum by this particular employee and am getting rather annoyed!

Best not to get annoyed - bad for the old BP!:eek: Although being faced with what are now politely called "legacy issues" makes the first months in a new job more pain than pleasure.

The employee probably doesn't mean to come across as hostile or condescending - perhaps getting anxious because he fears that there might be a tax problem or possibly a cut in salary on the horizon?

I hope you'll come back and explain how matters were resolved?

pdean52

Thanks for further input everyone.


Judwin - EE wants to pay £100 p/m gross into his pension - but then receive tax benefits on top. Yes tax relief on tax he hasn't paid........... This was the original agreement - why we're deducting £109.20 from monthly gross salary is, as xylophone politely puts it, "legacy issues."


As I should have pointed out his maths is indeed a "little off" and he's actually a very nice chap by the way - he's just trying to protect the "deal" that was agreed originally. I suspect the boss (an entrepreneur with a penchant for odd decisions) will ask us to honour the £280 per month contribution to his private pension scheme. For me this is more a matter of principle in having the employee understand how his contribution is made up and how lucky he is to get 156% ER contributions when everyone else gets 100%.


I shall provide a closing update most likely early next week once I have had a conversation with our tax specialists and more importantly the owner of the business early next week once he returns from Madeira.........

xylophone

the owner of the business early next week once he returns from Madeira........

Perhaps he'll take you with him next time!:rotfl: