Salary sacrifice limitation

sandsy

Does salary sacrifice limit my pension contributions?


For example, let's assume I'm in a salary sacrifice scheme where I earn £60k. Assume I currently make gross pension contributions of about £20k to take my taxable income down to around £40k to avoid HRT. Additionally, my employer contributes £10k, so there are total pension contributions of £30k pa.


If I'm in a position to increase my gross contributions to say £25k, total pension contributions for the year will be £35k. My taxable salary will also reduce from £40k to £35k.


As my pension contribution now matches my taxable salary, it seems I can't contribute any more this way?


So if I wanted to increase my personal contribution to £30k pa (ie. £40k total inc. employer contribution), is the only way to do it outside of the salary sacrifice scheme? ie. keep my taxable salary at £40k and make a contribution of £10k to a private arrangement?


My work scheme also offers AVCs? Does this change anything?


Thanks.

jem16

sandsy wrote: »

As my pension contribution now matches my taxable salary, it seems I can't contribute any more this way?

You could still contribute but you would only receive tax relief on 100% of your earnings - ie the £35k.

So if I wanted to increase my personal contribution to £30k pa (ie. £40k total inc. employer contribution), is the only way to do it outside of the salary sacrifice scheme? ie. keep my taxable salary at £40k and make a contribution of £10k to a private arrangement?

Correct.

My work scheme also offers AVCs? Does this change anything?


Thanks.

Not unless they offer the AVC scheme as non-salary sacrifice.

Spidernick

In theory you should be able to salary sacrifice up to 100% of your salary, but you'd only get tax relief to the extent that you are paying tax (so if you go under the £10K personal allowance for 14/15 you wouldn't get any further tax relief, assuming you don't have other taxable income).

Also bear in mind that, subject to any used allowances brought forward from the previous three years, tax relief on pension contributions is limited to £40K per annum (including any employer contributions).

DesG

If you are actually using salary sacrifice, you can contribute up to 40Kpa including your employers contribution, with the exceptions that you need to leave enough behind to pay yourself at least the minimum wage, and you do not exceed the lifetime allowance.

Ignore the answers discussing tax relief, salary sacrifice is pre-tax and pre-NI.

jamesd

sandsy wrote: »

Does salary sacrifice limit my pension contributions?

Yes. Your employer is not allowed to pay you less than minimum wage. this means that they are not allowed to let you use salary sacrifice for your whole pay but must insist that you get paid at least £6.50 an hour (less if under 21) (£13,520 a year for 52 40 hour weeks).

Your total pension contribution limit is your earned income, so the total pay. In addition there's the £40k per year and the minimum wage constraint on salary sacrifice.

Your taxable income is not a limit, it's all of the earned income. A person on £8,000 a year could make non-sacrifice contributions of £8k a year if they wanted to even though they pay no income tax. They would get basic rate tax relief added by the pension company. they wouldn't get the basic rate tax relief by salary sacrifice because there would be no income tax on pay, this is one case where salary sacrifice is not useful.

With a gross salary of £60k your employer could let you make salary sacrifice pension contributions of at least £46,480 a year. All of that would be taxed at basic rate with employee NI so you'd still get full salary sacrifice benefit on it all. If your employer in addition contributes £10k you'd have a total of £56,480 in pension contributions for the tax year.

Your employer is not responsible for enforcing the £40,000 annual contribution limit. They do not know how much carry-forward you have available from previous years. they will issue a notice to you if your contributions exceed £40,000 in the tax year but that is not a penalty notice or notice of problem, just making sure you know about it so you can pay the penalty if you do not have enough carry-forward.

In addition to the salary sacrifice contributions you can make contributions to a personal pension if you like, still subject to the £40k per year total.

In addition to the legal limit of minimum wage, employers may have higher limits. Mine had a 50% of pay limit for part of the pension contributions, a limit they removed for me when I explained my circumstances. The higher limit was to avoid employees paying in more than they could afford.

jamesd

Spidernick wrote: »

In theory you should be able to salary sacrifice up to 100% of your salary, but you'd only get tax relief to the extent that you are paying tax

Right about the tax but is is illegal to use salary sacrifice for 100% of pay because the employer would be breaching minimum wage law.

Spidernick

jamesd wrote: »

Right about the tax but is is illegal to use salary sacrifice for 100% of pay because the employer would be breaching minimum wage law.

That's interesting as when I did my flexible benefits for this year there was an option to go up to 100%, but what you are saying makes perfect sense.

zagfles

sandsy wrote: »

Does salary sacrifice limit my pension contributions?


For example, let's assume I'm in a salary sacrifice scheme where I earn £60k. Assume I currently make gross pension contributions of about £20k to take my taxable income down to around £40k to avoid HRT. Additionally, my employer contributes £10k, so there are total pension contributions of £30k pa.


If I'm in a position to increase my gross contributions to say £25k, total pension contributions for the year will be £35k. My taxable salary will also reduce from £40k to £35k.


As my pension contribution now matches my taxable salary, it seems I can't contribute any more this way?

Yes, you can. The 100% of earnings limit applies to your contributions only, not employer contributions. All contributions made by salary sacrifice are employer contributions, and so don't count towards the 100% of earnings limit.

Employer contributions do count towards the £40,000 annual allowance, but you can carry fowards unused AA from the previous 3 tax years.

So if I wanted to increase my personal contribution to £30k pa (ie. £40k total inc. employer contribution), is the only way to do it outside of the salary sacrifice scheme? ie. keep my taxable salary at £40k and make a contribution of £10k to a private arrangement?


My work scheme also offers AVCs? Does this change anything?


Thanks.

It makes no difference. However there will be a limit on salary sacrifice due to the national minimum wage as mentioned.

sandsy

Thanks for all the replies to this.


So if the numbers have been the same for the last few years, is the following true?


This tax year (ending April 2015), I have £10k of unused allowance.
For the previous 3 tax years, I have £20k per year of unused annual allowance (as the allowance was £50k in each of those years).
So in total I have an allowance of £70k before the end of this tax year?


But, and this is the bit I need clarification on, I can only get tax relief on an employee contribution up to the value of this year's taxable earnings of £40k? Is that right?

david78

zagfles wrote: »

The 100% of earnings limit applies to your contributions only, not employer contributions. All contributions made by salary sacrifice are employer contributions, and so don't count towards the 100% of earnings limit.

I am sure this is wrong. And contradicts what others have said here.

I make contributions to a final salary scheme by salary sacrifice and my statements show amount of annual allowance used (based on increase in value X 16). By your reasoning I am not using up any annual allowance.

Notfarfromtheborder

Think you can only backfill up to 100% of salary earned in the year you pay it. There will be more informed people who may be better placed to answer along soon.