Private Pension or Workplace via Salary Sacrifice?

Triumph13

With a small company they probably won't be geared up to cope with you changing pension contributions all the time so that's probably a non-starter for you. The NI savings aren't huge compared to the size of your income. The sweet spot between minimum wage and the HRT band that people are exploiting is only about £2,500 wide so saving 10% NI on that saves you £250 for each month you manage to do it.
Getting back to your original question, it all comes down to whether your firm is giving you THEIR savings on NI as well as your own savings. If not then all Sal Sac does for you is save 2% NI which may not be enough to offset charges and/or limited fund choices. If they give you their NI savings too then that would almost certainly outweigh all other consideration. The question to ask is 'If I sacrifice £100 of salary, how much gets paid into my pension?' If they say £100 then you are only getting your own NI savings and they are trousering the 13.8% themselves.

Jaguar_Skills

Thanks triumph. This was the full email we got when it was introduced. I think if I read it correctly that this means that we get the employers contribution as well then?

Salary Sacrifice

Further to discussions in our recent team meeting, I confirm that salary sacrifice will be available from 1st November 2017. The attached document explains how this works. I confirm that the figures will be re-worked in such a way to pass on the Employer!!!8217;s National Insurance saving to the employee. Please let me know if you would like to opt into this. From what I understand, it doesn!!!8217;t cost the employee or employer anything, but results in more money going into your pension.

Please note that if you would like to pay over any above the standard 2% into your pension you can. There are 2 ways this can be done. You can increase your 2% contribution to a specified amount, and or/you can make lump sum contributions. This can be done with or without opting into salary sacrifice, although salary sacrifice is the more tax efficient way of paying into the pension. Please note that to simplify the administration process of salary sacrifice, it will only be possible to pay in lump sums twice per year (through March and September pay runs).

Jaguar_Skills

This was an example in the St James Place thing we got.

bowlhead99

To summarise :
- workplace contribution better than personal pension contribution because as well as the tax relief which you could get anyway on personal contributions, you get employees NI saving of 2% and employer's NI saving of 13.8%. Both of those things you'll get if you salary sacrifice, as per your descriptions above.


- workplace sal sac contributions done at a low level with one or two lump sums, are better than doing monthly larger amounts, because instead of employees NI saving being all at 2%, there's a bit of saving at 12%, and that extra 10% saved on two to three thousand quid can be worth £250 or so, once or twice a year.


So basically you have an opportunity in March and September to make a big sal sac contribution and more 'normal' ones the rest of the time (which they won't change month to month for you, because they only want to allow two 'big' months to make the admin easier for them, fair enough).

So say you earn £125k a year, about £10400 a month. You can set up your sal sac pension to do the bare minimum sacrifice of 2% (£2500 a year, about £200 a month). So it changes your official gross salary to £10200 ish per month.

When you get to September there is a chance to do a lump sum. So you ask to do a special one off contribution of £8,900. As a result, your gross pay for that month drops from £10,200 (usual level after the 2% sal sac) to £1,300. If you work 37.5 hours a week at minimum wage of 7.83 an hour, 52 weeks a year divided by 12 months, your pay at minimum wage for a month would be about £1270, and you are getting gross pay of £1300, so no problems with being paid less than minimum wage.

So, for September due to your 'sacrifice' you earn a really low amount, and as a consequence of that paltry salary you don't pay much employee's national insurance for that month. If you had earned more than £1300 you would be paying employee's 12% national insurance on everything up to £3863 and 2% on the amount above that up to whatever you usually earn.



So your *normal* salary sacrifice pension contributions, which always take place in the space above £3863 a month, are only saving you 2% of NI, while part of this special lump sum salary sacrifice pension contribution in the gap between the £1300 declared gross pay for the month and the £3863 upper earnings threshold, is more lucrative, at 12% NI. So there's an extra 10% to be made on part of your contribution.

10% of the amount saved within the high rate NI band (ie 3863 less 1300) is about £256.

By taking the salary sacrifice like that, you are getting the special ability to save £256 of employees national insurance in that special lucrative band during September. If instead you decided to spread out the 'lump sum' sacrifice of £8900 across all the other months at about 740 a month, all the NI saving would be at 2%.

Obviously how much you have to sacrifice in a March or September to get down to ~£1300 gross for that month (salary staying above minimum wage) will depend on whether you usually earn £6k a month or £10k a month or 12k a month etc.

Jaguar_Skills

Thanks Bowlhead, that is really useful and thanks for taking the time to reply. Because the bonus fluctuates, I don't always know and therefore would need to work it out off your maths above (if I can)

If I made contributions which went over £40k what would the implications of that be?

I can certainly start doing those lump sum amounts into my workplace rather than personal pension. For instance last year I made 2x£10,000 contributions then a further one of about the same to make my contributions to just under the AA. The rest was made up of my standard £600 pcm into PP = £7,200.

I guess if I switch those contributions from PP to WP to say £12,500 per bonus period under salary sacrifice that would work?

Sorry if I have misunderstood.

Triumph13

Unless it coincides with the payment of a bonus or some such, you couldn't do a £12,500 lump sum as that would take you below minimum wage for that month (If you were earning enough to do that and still be getting minimum wage then you would be well into the Annual Allowance taper)
The amount you can sacrifice is always limited by the requirement to still be being paid minimum wage.

Jaguar_Skills

Triumph13 wrote: »

Unless it coincides with the payment of a bonus or some such, you couldn't do a £12,500 lump sum as that would take you below minimum wage for that month (If you were earning enough to do that and still be getting minimum wage then you would be well into the Annual Allowance taper)
The amount you can sacrifice is always limited by the requirement to still be being paid minimum wage.

But I will still get my normal wages so it wouldn't take me under min wage would it?

atush

Jaguar_Skills wrote: »

I’m not married (yet) but my gf doesn’t work as she looks after our little one. I don’t think she will go back to work to be honest. I’m still not sure given how much I would need to sal sacrifice that I could get to near min wage.

But as I’ve said before I am a bit lost.

Your GF is in a very precarious position.

If she reads this, she should go back to work and get her own pension and income, if you have no plans to marry the mother of your child.

badmemory

atush wrote: »

Your GF is in a very precarious position.

Agreed - is she even getting NI credits towards her state pension (via child benefit)?



Whilst it may not be as financially beneficial she/you should be paying the max possible into a pension for her.

Jaguar_Skills

atush wrote: »

Your GF is in a very precarious position.

If she reads this, she should go back to work and get her own pension and income, if you have no plans to marry the mother of your child.

We will get married but just wanted to wait until after the birth of our second. It will probably be in the next 3 years or so.

We do have a flat which we jointly own that has £150k equity in it so plus our current house with around the same in it she has a bit of a fall back

But I understand the concern for her. She isn't going to go back to work as my wage will cover us both and so it is nice for her to be at home with our son.

I guess the way it could work is I pay into a pension for her but then no salary sacrifice benefits unless her ltd company could in some ways do this.