Salary Sacrifice to remain in 20% tax bracket

SamDude

Hello all,

I've started a new job and am now in the higher-rate tax bracket.

I'm looking at ways to salary sacrifice my income and am trying to work out the numbers for paying more into my pension. I am also using childcare vouchers, so this is an additional consideration for dropping back into the basic rate tax bracket.

For simplicity, the numbers I am using for my question and calculations are:

Salary (gross): £47000 (£3916/month)
• Salary Sacrifice - Childcare Vouchers: £243/month (only get this amount if taxible pay is <£43000)
• Salary Sacrifice - Private Medical Insurance: £63/month (with Taxible BIK at £124/month)
• Salary Sacrifice - Pension: ? (new employer pays 5% contributions)

There is a difference of (47000-43000)= £4000 that I need to sacrifice each year so I drop to the £43000 amount and remain in the basic-rate tax bracket.

What amount should I salary sacrifice into the pension each month? Is it:

• All £4000/year into the pension?
• £328/year (£4000 minus the childcare vouchers (£2916/year) and PMI (£756/year))
• Something else?

Thank you for your help.

SamDude

Anybody able to help please?

Savvy_Sue

I'm sure someone will be along to help, but I suspect many of us have had other things to attend to over the last couple of days.

PennyForThem_2

Beware salary sacrifice if you are near retirement age and in a defined final salary pension scheme

SamDude

PennyForThem wrote: »

Beware salary sacrifice if you are near retirement age and in a defined final salary pension scheme

Thanks - I am sub-40 (just), so not nearing retirement yet. The scheme is a defined contribution pension (new employer, so not eligible for the final salary scheme).

silvercar

I would have thought the pension and the PMI need to be used to get the salary below the higher rate in order to qualify for the child care vouchers.

SamDude

silvercar wrote: »

I would have thought the pension and the PMI need to be used to get the salary below the higher rate in order to qualify for the child care vouchers.

Thanks silvercar.

This mean that:
-756 (PMI salary sacrificed)
-3244 (Pension contribution salary sacrificed)
=4000 (total sacrificed)

With the full £243 childcare vouchers then being deducted from the remaining £43000 taxable salary.

This may be a basic calculation, but it is an important decision so I want to make sure I'm doing it right. Thanks again.

zagfles

SamDude wrote: »

Thanks silvercar.

This mean that:
-756 (PMI salary sacrificed)
-3244 (Pension contribution salary sacrificed)
=4000 (total sacrificed)

With the full £243 childcare vouchers then being deducted from the remaining £43000 taxable salary.

This may be a basic calculation, but it is an important decision so I want to make sure I'm doing it right. Thanks again.

You seem to be forgetting to add the taxable BIK for the PMI to your taxable income!

The rules for childcare vouchers are stupidly complicated - your employer has to do a "basic earnings assessment" to guess if you'll be a higher rate taxpayer or not - it's pointless rubbish devised by those who don't understand how tax is supposed to work or who think childcare should be treated as a perk not an employment expense, but there it is. See http://www.computersharevoucherservices.com/employers/Pages/The-Basic-Earnings-Assessment.aspx

SamDude

Just checked and the taxable BIK for PMI is showing as £1629 per year (I've selected full family cover).

Does that mean my calculation should either be:
+1629 (BIK on PMI)
-756 (PMI salary sacrificed)
-4873 (Pension contribution salary sacrifice required)
=5629 (total sacrificed)

-or-

-1629 (BIK on PMI)
-756 (PMI salary sacrificed)
-1615 (Pension contribution salary sacrifice required)
=4000 (total sacrificed)

...or am I mucking up the numbers?

zagfles

SamDude wrote: »

Just checked and the taxable BIK for PMI is showing as £1629 per year (I've selected full family cover).

Does that mean my calculation should either be:
+1629 (BIK on PMI)
-756 (PMI salary sacrificed)
-4873 (Pension contribution salary sacrifice required)
=5629 (total sacrificed)

-or-

-1629 (BIK on PMI)
-756 (PMI salary sacrificed)
-1615 (Pension contribution salary sacrifice required)
=4000 (total sacrificed)

...or am I mucking up the numbers?

The BIK is taxable income so it needs to be added, like I said above! Your taxable income is salary plus taxable BIKs minus sal sac. So the first one.

But if your objective is to get the full £243 childcare vouchers tax free you need to read and understand my previous post and the link about basic earnings assessment and maybe ask your employer how they calculate it. They might have already done the calculation.

SamDude

Thank you zagfles, I am confident I have my answer now.

I'm not trying to be to stingy regarding how much to pay into the pension, but didn't want to over/under pay by a big amount.

I will round up the the £4873 and put an extra £408/month into my pension. I'll speak with HR next week when everyone is back to fully understand their calculation for the basic assessment.