Increase salary sacrifice - stop mortgage O/P's??

BoxerfanUK

Hello all,

Last year, following some excellent advice from people on this board I convinced my DW to persuade her employer to start a Salary Sacrifice scheme to boost her pension contributions.

Since July 2016 she has been sacrificing £1666.00 per month (20K pa) into her companies' DC scheme. Her employer already pays a 6% contribution on her gross salary (currently 80K pa as of 1/1/17) as well as 10% of the employer NI rebate into her pension following her S/S .

However, having read a thread on this board the other day about overpaying mortgage Versus not verpaying in favour of extra pension contributions this has really got me thinking and wondering why WE haven’t considered this as well, as it seems so obvious now!!

Currently, we are comfortably overpaying £1300.00 per month with a view to paying the mortgage off early by the end of 2019, but I’m now thinking we should perhaps stop this and consider diverting this £1300 pm into additional S/S for her if we can.

If we do so, her annual pension contributions would total £55,740 including her employer contributions, which would put her well over the annual allowance limit of 40K. Whilst I’m aware there is a 3 year carry forward facility I’m not sure exactly how this works or where to start. I believe she could utilise unused allowances from 2013/14 (50K), 2014/15 (40K), 2015/16 (40K).

I would be most grateful for any opinions on the best way to approach this? For starters, I believe that before she can take advantage of C'fwd from previous years, she has to have this year fully paid up to the 40K limit. How best to achieve this?

zagfles

BoxerfanUK wrote: »

Hello all,

Last year, following some excellent advice from people on this board I convinced my DW to persuade her employer to start a Salary Sacrifice scheme to boost her pension contributions.

Since July 2016 she has been sacrificing £1666.00 per month (20K pa) into her companies' DC scheme. Her employer already pays a 6% contribution on her gross salary (currently 80K pa as of 1/1/17) as well as 10% of the employer NI rebate into her pension following her S/S .

However, having read a thread on this board the other day about overpaying mortgage Versus not verpaying in favour of extra pension contributions this has really got me thinking and wondering why WE haven’t considered this as well, as it seems so obvious now!!

Currently, we are comfortably overpaying £1300.00 per month with a view to paying the mortgage off early by the end of 2019, but I’m now thinking we should perhaps stop this and consider diverting this £1300 pm into additional S/S for her if we can.

If we do so, her annual pension contributions would total £55,740 including her employer contributions, which would put her well over the annual allowance limit of 40K. Whilst I’m aware there is a 3 year carry forward facility I’m not sure exactly how this works or where to start. I believe she could utilise unused allowances from 2013/14 (50K), 2014/15 (40K), 2015/16 (40K).

I would be most grateful for any opinions on the best way to approach this? For starters, I believe that before she can take advantage of C'fwd from previous years, she has to have this year fully paid up to the 40K limit. How best to achieve this?

This is complicated at the moment because of the changes to align pension input periods to the tax year. See https://www.gov.uk/government/publications/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods but pour yourself a stiff drink first.

Ask her pension provider for a statement of pension input amounts for the last 4 "tax years" including the 2 "mini-tax years" last year.

jamesd

She can ask her employer to increase her salary sacrifice to the point where they are only paying her minimum wage. They aren't allowed to go lower than that in any pay period. She can also make non-work contributions if required. She can ask her employer to use a lower level starting in April pay. Her employer doesn't have to accept these requests so she should be sure that they will accept the drop later before going very high to catch up in the last three months of this tax year.

The allowance use is taken from the current year first, then the oldest past year with still unused allowance. No need to tell anyone about this until she reaches the point where she's gone over the available allowance, if ever. Then she has to tell HMRC about the part that is over.

Her main task this year can be to use up this year's 40k and anything still unused from 2013-14 because the 2013-14 is now use it or lose it on 6 April.

The pension scheme is required to send her a letter when she goes over 40k in a tax year. Nothing to worry about, it's just to be sure she knows that she either had to use some carry-forward or tell HMRC if insufficient was available.

Triumph13

A couple of key points to watch out for here:

1. If she contributes more than £37k of her £80k salary then (unless she has other taxable income) she'll only be getting 20% tax relief on the excess. You need to be sure that makes sense in terms of things like LTA, likely tax rate in retirement, etc.
2. She can only make use of unused allowance from previous years if she was a member of a pension scheme in those years. If she was, then obviously you'll need to deduct the amount of contributions in those years from the AA figures you quote.

jamesd

She's in a salary sacrifice scheme so there isn't such a steep cliff at the higher rate threshold. Crudely, her income tax relief drops from 40 to 20 percent but her NI relief increases from 2 to 12 percent so the net effect is just a drop from 42 to 32 percent total relief before the effect of any employer NI saving sharing.

One of the reasons that I wrote crudely is that she may have taxable non-work income, as hinted at by Triumph13. If she does she can get 52 percent combined relief in the range where her work sacrifice is in the basic pay range so she saves the 12 percent NI but the reduced income can still be saving her 40 percent in income tax.

Triumph13

jamesd wrote: »

She's in a salary sacrifice scheme so there isn't such a steep cliff at the higher rate threshold. Crudely, her income tax relief drops from 40 to 20 percent but her NI relief increases from 2 to 12 percent so the net effect is just a drop from 42 to 32 percent total relief before the effect of any employer NI saving sharing.

That's embarrassing. I somehow missed the fact that Gordon Brown aligned the UEL for NI and the threshold for HRT in the 2007 budget and have been blithely assuming for nearly a decade that there was still a band of income where your NI drops but your tax rate hasn't gone up yet. Oops!

zagfles

jamesd wrote: »

She's in a salary sacrifice scheme so there isn't such a steep cliff at the higher rate threshold. Crudely, her income tax relief drops from 40 to 20 percent but her NI relief increases from 2 to 12 percent so the net effect is just a drop from 42 to 32 percent total relief before the effect of any employer NI saving sharing.

One of the reasons that I wrote crudely is that she may have taxable non-work income, as hinted at by Triumph13. If she does she can get 52 percent combined relief in the range where her work sacrifice is in the basic pay range so she saves the 12 percent NI but the reduced income can still be saving her 40 percent in income tax.

Even if no other taxable income, she could still get 52% relief on part of the contributions by making uneven contributions throughout the year, since tax is assessed on annual income and NI is assessed on pay period income.

For instance on £80k with £37k sal sac contribution, she'd get 42% relief if evenly spread contributions.

But if the £37k sal sac was spread over 7 months of the tax year instead of 12, tax would be the same but NI would be £1541 less.

Of course need to watch out for min wage and also any min employee conts to get max employer conts.

jamesd

Yes, all other things being the same I think optimal would be maximising the number of months at around minimum wage so as much of any sacrifice as possible is in basic rate pay range.

It'll be interesting to see whether the proposed change to also make NI based on annual pay like income tax instead of pay periods happens.

There are lots of interesting quirks around to make or save money that get discussed here...:)

michaels

If having sal sac down to min wage you then make personal contributions from the salary received do you get 20% relief on the whole lot even though most of it incurred no tax because of your personal allowance?

zagfles

michaels wrote: »

If having sal sac down to min wage you then make personal contributions from the salary received do you get 20% relief on the whole lot even though most of it incurred no tax because of your personal allowance?

Depends - if you contribute to the employer's scheme from gross pay (ie what HMRC confusingly call a "net pay arrangement") then you won't get any tax relief on any amount below the personal allowance.

If you use a RAS scheme, ie a employer scheme that takes contributions from net (after tax) pay, or a personal pension, then you do get tax relief for conts that take you below the PA.

jamesd

michaels wrote: »

If having sal sac down to min wage you then make personal contributions from the salary received do you get 20% relief on the whole lot even though most of it incurred no tax because of your personal allowance?

In the case of salary sacrifice you never get tax relief for salary sacrifice contributions below taxable pay level. This is because salary sacrifice pension payments are always "employer contributions" and even relief at source pension schemes do not add basic rate relief to employer contributions.

You have described how to get around that, making your own contributions outside the salary sacrifice arrangement. You would get the relief at source tax relief and are entitled to it if you do that.

So yes, your plan would be fine and get you the relief.