Salary sacrifice and NI contribution question

isayhello

Was reading an article the other day explaining the different methods for contributing to a pension and they mentioned a net pay method where a contribution is made before tax is taken out which provides tax relief because you're overall salary is lower. Then I started reading about salary sacrifice which sounds identical because I read that the employer may contribute but they don't have to.

What's the key difference between these 2 schemes? is it purely that one provides NI relief as well?

Second question is, for a higher rate tax payer, you only get 2% NI relief, is this on your salary above the higher rate threshold, so you'd get 12% NI relief from 0-higher threshold and then 2% above that?

Thanks

MallyGirl

Yes - that is right. In Sal sac you reduce the employee NI so a high rate payer pays 40% less tax and less 2% NI above the 40% band. If you sal sac yourself below that band you save on 20% tax but 12% NI for the bit below. My DH’s employer also puts the ‘saved’ employer NI into his pension but mine doesn’t.

adamh87

Also reduces your student loan repayments (at the cost of a longer loan term obviously)

MallyGirl

and could potentially get you back into qualifying for child benefit if you were earning over £50k (and sal sac to below £50k) and your partner wasn't.

cloud_dog

MallyGirl wrote: »

Yes - that is right. In Sal sac you reduce the employee NI so a high rate payer pays 40% less tax and less 2% NI above the 40% band. If you sal sac yourself below that band you save on 20% tax but 12% NI for the bit below. My DH’s employer also puts the ‘saved’ employer NI into his pension but mine doesn’t.

I thought I had read on these boards somewhere that there is a way for a 40% HRT to benefit for the full 12% NI reduction, and that was to make a lump sum payment in a single month (earnings limits etc applicable), rather than the more usual £X per month. I believe it related to the way that income tax is an annual calculation but NI is based on the months payment?

MallyGirl

yes - I have done that. It is dependant on your employer allowing you to make adhoc changes to your AVC contributions by sal sac. I ended up paying negative PAYE and minimal NI by contributing significant AVCs in a 3 month run instead of dividing it equally over the year.

isayhello

@MallyGirl thanks for the information, just to clarify, if you were earning 50k then you'd receive 20% tax relief upto the higher rate threshold, then 40% relief on the difference between that threshold and the 50k earnings?

Your NI relief would be 12% upto the threshold and then 2% after that, so in total 20% tax relief and 12% NI to threshold + 40% tax relief and 2% NI to 50k earnings?

Thanks, just a little unsure.

MallyGirl

yes - that is true but there is the extra complication that NI is calculated weekly so you will make a bigger NI saving by making a big AVC in one month rather than split across the year - but you cannot sal sac yourself below the minimum wage. Tax is an annual calc so it doesn't matter what pattern of AVCs you use there.

Triumph13

MallyGirl wrote: »

yes - that is true but there is the extra complication that NI is calculated weekly so you will make a bigger NI saving by making a big AVC in one month rather than split across the year - but you cannot sal sac yourself below the minimum wage. Tax is an annual calc so it doesn't matter what pattern of AVCs you use there.

NI is calculated per paycheck so if you are weekly paid it's done weekly, monthly paid it's monthly.


If the OP wants an example, take a person earning £60k who wished to contribute £12k pa via sal sac. They will pay the same tax however they do it as that's an annual calculation.


If the contribute £1k every month, then their monthly NI bill will be £373.36. If they instead move to 2 months of nil contributions and 1 month of £3k then in the nil months their NI bill only increases by £20 (= 2% of £1000), but in their £3k month it drops to £158.36 as they are well into the 12% band for that month. Across the 3 months this saves £175.


Obviously this is a simplified example as in most cases people can't go all the way to nil without missing out on full employer contributions, but it hopefully shows how the process works.

isayhello

If the OP wants an example, take a person earning £60k who wished to contribute £12k pa via sal sac. They will pay the same tax however they do it as that's an annual calculation.


If the contribute £1k every month, then their monthly NI bill will be £373.36. If they instead move to 2 months of nil contributions and 1 month of £3k then in the nil months their NI bill only increases by £20 (= 2% of £1000), but in their £3k month it drops to £158.36 as they are well into the 12% band for that month. Across the 3 months this saves £175.

Thanks @Triumph13 I got a little lost with the working out, how is the NI £373 for a 1k per month contribution?

Is it possible to change payments like this? my pension is just taken per month by the provider from my pay cheque, I don't make any one off payments.