Salary Sacrifice Query

Snapdragon

I've only just increased my salary sacrifice substantially to reduce my tax bill and get more in my company pension pot, however still not convinced whether I've opted for enough or could opt for more.

I'm not sure how the tax relief on your annual pension contributions work and how the statement "you’ll normally only get tax relief on £40,000. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years." applies to me.

Does that apply to salary sacrifice? I know I haven't salary sacrificed anywhere near £40k a year in the past 3 years.

Actually contributions probably in the region of £40k combined over the last 3 years, but does that mean I have £120k outstanding allowance (80ish from previous years plus 40k this year) available? Can I salary sacrifice substantially more than £40k this year to gain the tax/NI advantages and avoid the 40% tax?

Could I for example salary sacrifice 80% to really boost the pension pot and would it be a good idea? When I asked if there was a maximum the company's benefits manager merely responded with a leaflet about the governments annual allowance rules.

I'm already 56 so not too worried about the 'locking away' aspect. I have reasonable cash emergency funds, probably too much in cash, so after some pointers from forumites on the savings board will be putting 20K into a S&S ISA before this tax year end.

Am thinking I could take even less salary and live off some of the extra cash I've got in the bank however not sure whether I would be better sticking with about 40K into pension this year, and some of the cash into a 2nd Isa, purely because they are more flexible?

The tax/ni advantage of the salary sacrifice option, seems hard to ignore.
Any clarification or suggestions anyone could provide would be appreciated.
Thanks.

Brynsam

How much do you earn? It could impact on the answer - it's not just idle curiosity!

lisyloo

When I asked if there was a maximum

Your employer legally needs to pay you minimum wage.
So max is your income - min wage
(unless your employer set a max bu doesn't sound like it).

Linton

Salary Sacrifice is counted as an employers contribution. Employers contributions are included in the same £40K+carry over limit as personal contributions. In your case this would seem to be 4X£40K-£40K=£120K assuming no actual employer contribution beyond what you have included in the SS figure.

Apart from that limit you cant Salary Sacrifice to reduce your income below Minimum Wage. Plus if you were earning more than £150K after Salary Sacrifice the £40K limit would be reduced.

As it happens the tax relief sanction for exceeding the £40K limit doesnt apply to you because as an employer pension contribution SS ensures you dont pay into a pension and so dont need tax relief. What happens if an employer exceeds your £40K limit, I dont know.

As to whether you should maximise your SS: It makes sense to avoid 40% tax completely. Beyond that things are more arguable. Assuming you are a basic rate tax payer in retirement getting basic rate relief on pension contributions gives you a net benefit of the tax on the 25% tax free lump sum which is 5% of the whole. Nice to have but maybe other factors are more important. One thing you dont want to do is to put so much into your pension that you have to pay higher rate tax on the drawdown if you want to eventually get at all the money.

lisyloo

Assuming you are a basic rate tax payer in retirement getting basic rate relief on pension contributions gives you a net benefit of the tax on the 25% tax free lump sum which is 5% of the whole.

Plus there is a tax free personal allowance each year (currently £11,500).
Using 4% as a figure, this is irrelevant to anyone with a pot of > £383,333.

calculated post tax free pot as £287,499.75 and 4% of that per year.
An approxmation of course but give you some kind of ball park of the amount you need to get above personal allowance.

Oh and don't forget employers NI if applicable !!!
My employer passes on the full 13.%

I'm almost 50 (which means my family and career planning are not in doubt) and I'm putting in all I can without compromising my current lifestyle choices plus contingency.

Linton

Yes there are other possible benefits, though most of the tax allowance will be taken up with SP once you reach the appropriate age. Given the OPs apparently high income and age I assume that he will be well into the basic rate tax band for one-off increases in pension made at this stage.

lisyloo

though most of the tax allowance will be taken up with SP once you reach the appropriate age

Good point - but there could be a gap (as you've stated) for example between 55 and 67.

Snapdragon

Linton wrote: »

Yes there are other possible benefits, though most of the tax allowance will be taken up with SP once you reach the appropriate age. Given the OPs apparently high income and age I assume that he will be well into the basic rate tax band for one-off increases in pension made at this stage.

OP is a she not a he and not really high income, yes 40% tax bracket but not even approaching 100k.

I had a bad experience with an IFA a couple of years ago.

I've been paying 5% via salary sacrifice with employer matching that for years. Not sure about the employer NI comments or how to tell? The amount that goes into my pension each month is twice what shows as the pension deduction on my payslip.

I suggested to the IFA, I should put a higher percentage in, but he told me not to put more in my company pension since they wouldn't match anymore than 5%. Have since realised I should have gone with my gut instinct, as that was terrible advice!

So for a couple of years I've had at least £1500 post tax income a month spare, that's been accumulating, instead of going into my pension pot and reaping the benefits of bringing my tax level down. I'm now trying to rectify the situation.

I get an annual bonus in May which I've sacrificed the last couple of years and will do again this year. I've just increased my salary sacrifice level and brought my take-home down by about £1500 a month. still paying tax but no idea what level.

Since I'm salary and bonus sacrificing, as lisyloo pointed out the money goes into my pension as employers pension contribution and judging by the total for this tax year on my payslip I'm estimating (not having checked exact figures yet) only about 40k will have gone in over the last 3 years.

Hence the confusion now, do I sacrifice even more, which would amount to more than 40k allowance this year because it brings the tax down more and live off the accumulated money which is languishing doing very little except serving as a rainy day fund! Or do I keep the salary sacrifice at the current level and try to get more of the cash into other options, or perhaps even a combination of those?

I'm not sure my best options.

starving_artist

In relation to changing the amount of your contributions, I have been told that each time you do this you need to put in place a new variation of contract. I have also seen conflicting information about whether changes have to be justified by a 'lifestyle change' and whether it is permitted or not to make one off increased contributions. Does anyone have any examples of how a variation should be worded?

Snapdragon

starving_artist wrote: »

In relation to changing the amount of your contributions, I have been told that each time you do this you need to put in place a new variation of contract. I have also seen conflicting information about whether changes have to be justified by a 'lifestyle change' and whether it is permitted or not to make one off increased contributions. Does anyone have any examples of how a variation should be worded?

I think the whole question of, when and by how much, you can vary contributions may be company specific. My company allows me to change as often as I like, I just have to send a form to payroll before payroll cutoff date specifying the % I want to sacrifice, so in theory I could make a change each month since I'm paid monthly, but I don't intend to do that. Just want to figure out the right level and stick with that.

michaels

Previously the govt limited it to one change per tax year, now it is up to the employer how often you change sal sac.

In the past I have sal sac'd down to nmw as I benefit from 20% income tax, 12% ni and 10% of the employers ni saving and am unlikely to be higher rate tax on retirement. You can carry forward up to 3 years, at some point this was reduced from 50k pa to 40k, the oldest year may still be 50k? There was also some fun with pension input periods in 2015/6 which means some had an 80k allowance that year rather than 40k.

Edit: 13/14 was the last 50k year so no longer relevant