Smart pay - pensions question

deaglecat

My employer runs a DB scheme and Smart Pay.

As I understand Smart Pay, it is a salary sacrifice scheme designed to reduce NI contributions. It does this by the company paying ALL the pensions contributions and reducing salary to match (effectively running a non-contributory pensions scheme based on a reduced salary).

The non-smart pay alternative is the employee contributing and getting tax relief on employee contributions in the monthly payroll

I think it makes little difference to monthly net pay.

But... it seems to me that a lower salary means less eligibility for higher rate tax relief and hence a lesser amount of money that can be put net into a SIPP to optimise tax relief.

or to put it another way, are my DB pensions contributions for the year in smart pay effectively zero ?

If not, under these circumstances, it would seem to be better to opt out of Smart Pay.

zagfles

It makes no difference tax wise. You get same tax relief either way. But using sal sac gets you and your employer NI relief too.

deaglecat

Thanks - just seems counter intuitive to have pensions benefits accrued count against £40k annual allowance (based on a figure that the pensions scheme give me ... irrespective of contributions) but not for tax.

I suppose it makes sense. I'm not getting tax relief on the contributions made via salary sacrifice.

greenglide

And, crucially, it is normal practice for employers to use your earnings plus the amount sacrificed for pension when calculating salary for reporting purposes for mortgages etc.

It can impact earnings related benefits though which can actually be good for tax credits etc.

deaglecat

Rumour is that Salary Sacrifice is up for review in the budget. That'll make some of (the already in deficit) DB schemes go deeper into the red because my company puts its saved NI into the scheme.

greenglide

Stopping salary sacrifice isn't at all easy so the Chancellor would need to do something quite remarkable to ditch it, especially for DB schemes. At the end of the day all sacrifice really is is a swap of lower pay for a non-contributory pension, this will need some clever foot work to ditch quickly, it really needs a proper in depth change.

But anything is possible. I certainly don't think that salary sacrifice has a long term future but IMHO a couple of years yet.

jamesd

deaglecat wrote: »

I'm not getting tax relief on the contributions made via salary sacrifice.

You are getting that relief. It's just being paid in automatically because the pension contributions are made before income tax has been deducted, so there's nothing to reclaim because you never paid the tax in the first place.

The non-smart pay alternative is appropriate for employees who are not tax payers. They will not get any income tax relief under a salary sacrifice pension because there would be no income tax anyway on their pay. But if they pay in after the nil tax, they can get 20% basic rate tax relief added even though they didn't pay it in the first place.

mania112

I wouldn't be surprised if Salary Sacrifice is one of the things removed at the Budget.

jamesd

I'll just wait and see rather than fretting. If it happens I'll scrap a high proportion of my pension contributions, the basic rate band, and switch to more VCT instead, assuming I'm not caught up in the stampede to do the same and VCTs continue to exist on favourable terms.