Salary Sacrifice Wages / Benefits?

6022tivo

Just a quickie.

I'm setting my salary sacrifice for the year, I see £12,500 is going to be the lower limit.

After the LEL, I set my salary for max £12,500 but I think I am missing a trick.
On my P11D (I think it is) I also have 2 healthcare things that add up to about £500 in benefits.

So, should I be setting my salary sacrifice so my pay is around £12k to take full advantage, or does it not take into consideration benefits?

Hope that makes sense.

bowlhead99

Not quite sure if you're confusing terminology. The "Lower Earnings Limit" or "LEL" as it's known in the tax man's world, is the term for the level at which you qualify to earn NI credit ((£118pw/ 6136pa) despite not necessarily having to pay NI yourself, because you only pay NI after the Primary Threshold (£166/w £8632 pa). Those numbers are quite a bit below the level you're talking about.

£12500 is the standard personal allowance for income tax. However, you have other employment benefits using up some of that allowance (£500 of healthcare stuff). So taking a £12500 salary plus the £500 of benefits for £13000 of total income with only a £12500 allowance to set against it all, will leave you in a taxpaying position on the last £500 which doesn't fit into the allowance.

You could avoid that tax by sacrificing further salary to get pension instead, and that would also save you some NI too. Although, depending on age and many hours you work, the more you sacrifice the more you may risk getting paid less than minimum wage, which may be an issue on your scheme.

If you do have lots of spare money after sacrificing down to £12k, and there's no more income tax saving to be had by sacrificing further, you could still make private pension contributions into a separate pension scheme and get extra relief that way (although only tax relief and not NI saving).

6022tivo

Yes, appologies.
When I set my percentage last year, the company took the LEL off my salary before using my percentage for salary sacrifice.
Not sure why, but yes I was getting confused.

Ok, I will adjust accordingly knowing that my health benefits account towards my personal allowance.

Everything else I have is technically in tax free investments and savings, so I feel this is the best way.
I can afford to live on 12k a year, and the companies salary sacrifice is the best way to boost my pension pot especially as my company also give the employee their NI saving as well and ours.
Winner Winner Chicken Dinner.


If I'm doing this wrong, then let me know. I am contracted for 28 hours a week, so am safe for the minimum wage as far as I understand it.

bowlhead99

6022tivo wrote: »

I can afford to live on 12k a year, and the companies salary sacrifice is the best way to boost my pension pot especially as my company also give the employee their NI saving as well and ours.
Winner Winner Chicken Dinner.

If I'm doing this wrong, then let me know. I am contracted for 28 hours a week, so am safe for the minimum wage as far as I understand it.

What you're doing in proposing to sacrifice down to £12k is fine if you're not breaking your annual pension contribution allowance in doing so. Beyond that:

1) further salary sacrifice if you can afford to live on less than 12k

If the company is giving you their NI saving as well as their own, it may be worth making further sacrifices (ie to below £12k) because the saving of your NI and their NI will, together, be worth over 20% of the income you sacrifice. That's a nice little boost to the funds that then go into your pension compared to the net pay you would have received, even though you don't actually save any income tax because you weren't paying any.

That can be useful down to the "Primary Threshold" for NI purposes (£8.6k as mentioned above). Below that point you'd stop getting the benefit of NI savings (i.e. because there is nothing to pay in NI on low salaries anyway). Your ability to sacrifice that low may depend on minimum wage or other employer policies.

2) further private pension contribution if you can afford to live on less than £12k

Once you've made a nice efficient sacrifice in your work scheme and are no longer paying income tax, a private pension is a good idea. As long as your total private and work pensions aren't going over the annual allowance for contributions, the pension provider is allowed to automatically claim tax relief at basic rate and add it to your pension investments: you put in £800 from your net pay and they turn it into £1000. That's a great deal if you hadn't even paid income tax on the way to getting your net pay - it's literally free money.

So, if you can survive on lower than £12k and have a goal of seriously boosting your pension pot, you can either use the salary sacrifice method in (1) to avoid you and your employer paying NI and get it in your pension pot, or use the private pension contribution method in (2) to get tax relief added to your pension pot when you hadn't even paid tax in the first place. Both are effectively a 'free' boost to your pension pot, with (1) being slightly more valuable as the percentage is a bit more than the 20% basic rate tax.

Pensions are taxable in retirement of course (after the tax free lump sum has been taken out, and only to the extent you draw more out than your personal allowance in a given year) so if you're amassing a massive pension pot which would put you on the high rate tax band in retirement, it may not be worth holding back from absolutely maxing out your pension limits. But for most people it's worth doing if you can afford it.

If you are wondering if you can afford to live on under £12k, but do like the idea of free money, then perhaps consider funding it from your existing pile of tax exempt investments and your savings, if you have more than you need to generate day to day income and to cover emergencies until the age you can access pension.

6022tivo

Very interesting post.

I had always thought that there was no point of dropping below £12k, as there was no benefit. I hadn't considered the NI saving.
For some reason, I thought the Company NI bit they passed onto me was in the region of around 3%.

I don't fancy a 2nd private pension so will look at option 1. I know they do not allow a combination of hours that would go below a minimum wage (Currently contracted for 28 hours), so would have to work that out.

I also have enough NI credits (I think), so don't really hve to worry about paying NI?? Or do I??