Living Wage question

Sterlingtimes

I ask this question by way of an illustration.

Let's say I work in April, May and June and then retire.

I earn £5,000 in each of the three months and using salary sacrifice ask my employer to pay £5,000 less the Living Wage £1,218.75 (in my case) into my Direct Contribution pension. I am not permitted to sacrifice the Living Wage.

The amount I receive as taxable income in the three months is 3 times £1,218.75 = £3,656.25.

Am I free after June to pay £3,656.25 into my SIPP assuming I make no further pension contributions and no pension payment during the remainder of the year?

Linton

I doubt you will find an explicit official statement. I can't see any reason why not. You have been employed for the living wage in a job that provides a large employer pension. You can in any job choose to contribute all your income into a pension, you don't have to have left employment to do it. It's only because salary sacrifice is counted as employer pension contribution that the living wage causes an issue.

System

I suppose there is also the question - is the Living Wage cumulative, over a year, or does it apply to every month, day, every hour, on a sort of minute1/hour1 basis?

ThinkingOutLoud_2

I believe previous threads have confirmed:-
- there is a living wage limit to what you can salary sacrifice as you state
- this does not impact your pension contribution limit of 40k per year - so as you will not have earned more than that - you are fine.

Something else for you to consider as a higher rate tax payer. You can also contribute some unused prior years allowance.

This would be very smart in your last year before retirement as you can get an instant 40% kick on your money and then get 25% tax free.
http://www.hmrc.gov.uk/tools/annualallowancelimit/question1.htm

And as you can drawdown your TFLS immediately - you can replenish cash savings you used to max out contributions, if need be.

Sterlingtimes

Clifford_Pope wrote: »

I suppose there is also the question - is the Living Wage cumulative, over a year, or does it apply to every month, day, every hour, on a sort of minute1/hour1 basis?

That in a way, Clifford_Pope, is the crux of the issue. Thank you. My employer considers that the Living Wage applies monthly and is not cumulative. Therefore in each month, the salary that can be paid to pension is limited by the employee's Living Wage.

Once I retire, I am presuming that the Living Wage constraint disappears and I may now make pension contributions on cumulative earned income this financial year up to £40,000.

Sterlingtimes

ThinkingOutLoud wrote: »

I believe previous threads have confirmed:-
- there is a living wage limit to what you can salary sacrifice as you state
- this does not impact your pension contribution limit of 40k per year - so as you will not have earned more than that - you are fine.

Something else for you to consider as a higher rate tax payer. You can also contribute some unused prior years allowance.

This would be very smart in your last year before retirement as you can get an instant 40% kick on your money and then get 25% tax free.
http://www.hmrc.gov.uk/tools/annualallowancelimit/question1.htm

And as you can drawdown your TFLS immediately - you can replenish cash savings you used to max out contributions, if need be.

Thank you, ThinkingOutLoud. I have contrived for several years to remain just within the 20% bracket and benefit from the Marriage Allowance. I think that I have used all prior year allowances.

Sterlingtimes

Linton wrote: »

I doubt you will find an explicit official statement. I can't see any reason why not. You have been employed for the living wage in a job that provides a large employer pension. You can in any job choose to contribute all your income into a pension, you don't have to have left employment to do it. It's only because salary sacrifice is counted as employer pension contribution that the living wage causes an issue.

Thank you, Linton. That's a useful clarification. It seems therefore that the Living Wage binds the employer for his contributions but not the employee for his contributions. I think that I am sold on this logic.

Linton

Sterlingtimes wrote: »

That in a way, Clifford_Pope, is the crux of the issue. Thank you. My employer considers that the Living Wage applies monthly and is not cumulative. Therefore in each month, the salary that can be paid to pension is limited by the employee's Living Wage.

Once I retire, I am presuming that the Living Wage constraint disappears and I may now make pension contributions on cumulative earned income this financial year up to £40,000.

Note that salary sacrificed money doesnt count as earned income but it does form part of the £40K limit.

You dont have to wait until you retire. You can pay all of your earned income as post tax pension contributions (-20% tax which is refunded into your pension) now.

jamesd

ThinkingOutLoud wrote: »

And as you can drawdown your TFLS immediately - you can replenish cash savings you used to max out contributions, if need be.

You can but only within the constraints of the lump sum recycling rules. Drawing on savings to increase contributions then replacing them with the lump sum counts as recycling so you need to ensure you're within at least one of the other limits.