Pension limit - really 100% salary?

jamesd

michaels wrote: »

Sal sac does need to be a regualr commtited payment (for at least 6 months/a year? Requiring a contract amendement?) so perhaps the OP needs to investigate whether his extra contributions are not being treated as Sal Sac for administrative reasons.

That doesn't apply to pension contributions. They can be changed at any time as often as desired. The original restriction on pensions was incompatible with auto-enrollment so HMRC changed their rules and no a pension contribution change us itself a lifestyle change. This doesn't affect non-pension sacrifice, which remains under the old rules.

A change to sacrifice always requires a contract change but that can be done in an addendum and electronically.

westv

My company sal sac still operates under the old rules.

jamesd

Then your company is acting illegally. By law they must give you the ability at least to opt out at any time, it's one of the requirements for auto-enrollment pensions.

Mine used to describe itself as working under the old rules but actually took requests to change. More recently they have introduced an online form to request changes.

bowlhead99

jamesd wrote: »

That doesn't apply to pension contributions. They can be changed at any time as often as desired. The original restriction on pensions was incompatible with auto-enrollment so HMRC changed their rules and no a pension contribution change us itself a lifestyle change. This doesn't affect non-pension sacrifice, which remains under the old rules.

A change to sacrifice always requires a contract change but that can be done in an addendum and electronically.

jamesd wrote: »

Then your company is acting illegally. By law they must give you the ability at least to opt out at any time, it's one of the requirements for auto-enrollment pensions.

However, giving you 'the ability to at least opt out' is not the same as 'letting you change the amount you sacrifice to anything you like at any time'?

For example to keep the numbers easy say I earn £50k and the company contributes 10% (£5k a year, £417 a month) without me being required to contribute myself.

I can contribute to it out of my net pay if I want, but there is also an option to formally change my contract for the year and sacrifice some of my salary - lowering my gross pay by anything up to 20% (per their policy) and then they will contribute that amount to my pension, which is efficient both on the timing of tax relief received and the saving of NI.

So, I sign up to modify my contract via addendum to give me 90% of my old salary (£45k) and 10% / £5k a year of pension contributions in addition to the £5k a year they were already contributing.

Their policy is that, absent a significant lifestyle change, I can't pick and choose my level of contribution from time to time during the year because at the time they wrote the policy, HMRC used to say they did not want people gaming the system and dodging NI by pretending the employer salary was a different figure each month on a whim.

However after a few months I decide this 10% sacrifice level is not right for me, and maybe I would prefer 5% or 20%. My life hasn't changed, I just fancy doing a different amount.

From what you wrote in the first quoted post, there is nothing to stop me changing the sacrifice to 5% or 20% as often as I want, HMRC have no restrictions on it any more, and per your second post if the policy was written in the old days and says I can't change my number each month it may be illegal.

However in your second post you imply the only bit the employer *must* allow is an opt out any time. So I could decide I don't want to be in the pension scheme at all, and want to opt out of it, and not do any sacrifice that month, and not get the free £417 employer money that month. And then I could apologise for messing the HR and payroll and finance department about, and ask to rejoin for the next month on a different level of contribution. That's not an attractive option because apart from messing around creating extra work for my friends in those other departments, I lose £400+ employer contribution forever (assuming I rejoin after only one month out).

My suspicion is that even though you said HMRC don't prevent in-year changes, it is quite usual in a lot of firms for an employer to have 'old rules' created a few years ago which they are not going to dig out and re-write, which say you can't change at any point absent a life-changing event; and then simply accommodate the 'HMRC rule change' by overlaying their old policy with "But yes if you want to opt out and entirely leave the scheme you can. And if you would like to join the scheme you can."

Or do the HMRC rules go further than that, in demanding that employers offering sal sac must have a super-flexible approach? I can't imagine they do, given employment terms are contractual and negotiated between employers and their staff based on what the employer wants to offer.

jamesd

That's right. Opt out is a legal requirement, as is opting in. Adjusting based in lifestyle changes or pension contributions is a contractual matter between employer and employee and the employer doesn't have to allow arbitrary changes at any time. They can if they wish, so far as pension contributions go.

fifeken

jamesd wrote: »

That's right. Opt out is a legal requirement, as is opting in. Adjusting based in lifestyle changes or pension contributions is a contractual matter between employer and employee and the employer doesn't have to allow arbitrary changes at any time. They can if they wish, so far as pension contributions go.

My employer is one who allows arbitrary changes at any time. I believe there is a technique to maximise the benefits by increasing the amount over a period of time, then dramatically reducing it for the rest of the financial year.

Can you, or anyone, explain this method for me?

jamesd

That's right. NI is based on each pay period, not the whole year, while income tax is on the whole year. If a higher rate income tax payer uses salary sacrifice down to minimum wage much of that sacrifice will be in the band where NI is 12% not 2%. Spread it evenly over the year and that maximises the amount that that saves only 2%. No difference for a basic rate tax payer, only for those with some higher rate income.

MoneySavingUser

bowlhead99 wrote: »

From what you wrote in the first quoted post, there is nothing to stop me changing the sacrifice to 5% or 20% as often as I want, HMRC have no restrictions on it any more, and per your second post if the policy was written in the old days and says I can't change my number each month it may be illegal.

My understanding of it is that:

- You have a statutory right to opt out of a pension scheme
- You also have a statutory right to opt back in - but the employer only has to let you do this once every 12 months, so if you wanted to do it a 2nd time they can say no
- If they are using a salary sacrifice scheme it must be available to all employees

So if your employer doesn't allow changes then you can use the above to change at least once.

I've always found it strange though as a lot of the employers who don't allow you to change your salary sacrifice % tend to allow you to change your non ss % as often as you want! With payroll packages these days it is no extra work for ss so extra admin being used as a reason isn't really valid.

http://www.pwc.co.uk/who-we-are/regional-sites/north-west/insights/pension-auto-enrolment-and-pension-salary-sacrifice-flexible-benefits-become-more-flexible.html

This special legislation now also includes employer pension contributions made under a registered pension scheme via salary sacrifice. This means that there is no longer a requirement (from a tax perspective) to include HMRC accepted “Lifestyle Events” within pension salary sacrifice arrangements. Lifestyle Events are particular events which allow an employee to opt out of the salary sacrifice arrangements before the expiry of the 12 month period, e.g. change of contractual work hours.

http://web.archive.org/web/20140712235826/http://www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm

• Special legislation has been enacted to prevent this happening for the following exempt benefits:
  • Employer provided childcare
  • Workplace parking
  • Employer provided cycles and cycle safety equipment
  • Employer made contributions under a registered pension scheme

In consequence, these benefits are exempt from income tax altogether. It is not necessary to stipulate a period for which the arrangement must be entered into or to set out 'lifestyle changes'.

So it isn't illegal to not allow the changes I think (apart from the optin/optout point) but it is also incorrect to say that HMRC don't allow changes apart from lifestyle events.