Salary sacrifice and NHS pension

Pursey

Hi all, I was wondering if any of you would be able to help.

I am a NHS employee, who was auto-enrolled onto the 2015 pension (Career Average Revalued Scheme) and who also uses the Childcare salary sacrifice scheme, paying £243 a month (the max).

I am trying to work out whether the tax saving (I am a 20% tax rate payer) is worth the impact that this has on my pension in future, but have no idea where to start with my calculations. Could anyone give me any advice? The accrual rate is 1/54 of my pensionable pay.

Thank you in advance to anyone who can point me in the right direction!

tibbles209

Each month you save £77.76 in tax/NI on the money you sacrifice, or £933.12/year.

If you didn't sacrifice that salary, you would accrue an additional £4.54 each month, or £54.44/year towards your annual pension on retirement. It would take approximately 17 years of receiving your pension to make back the amount you would have gained in tax/NI relief from salsac, although this ignores the above-inflation revaluation while you are an active scheme member, so in reality it would likely be a bit quicker than this.

So not a clear cut right answer as to how good value giving up some of your pension accrual for the tax/NI relief is, as it depends on how long you live, how adequate your pension will be to meet your needs with/without the extra accrual, and how much of a difference the salsac relief makes to you currently.

Might be worth having a look at Tax-Free Childcare to see whether this might suit your circumstances better, as this does not require salary sacrifice, although you would not get NI relief; https://www.moneysavingexpert.com/family/tax-free-childcare/

Pursey

Thank you ever so much for your reply @tibbles209, I really appreciate it. I had previously discounted tax free childcare as I am worse off (when only considering tax) but I hadn’t thought about it in relation to my pension, so will recalculate! Thanks again!

tibbles209

No problem, although I'm afraid I just realised I forgot to account for the cost of your employee contribution in my calculations; sorry! This would bring your effective tax relief rate up to 32% + whatever your employee contribution tier % is.

So for example if your contribution rate was 9.3% (contribution tier is based on pensionable income) your effective tax/NI/pension contribution relief would actually be 41.3%, or £1204.31/year meaning that (ignoring above inflation revaluation) if you were to opt out of childcare tax relief schemes altogether it would take over 22 years of collecting your pension to make back the money you would have gained from tax relief, if you were to remain in your salary sacrifice scheme.

If you were to use Tax-Free Childcare, depositing a net £2332.80/year would result in you having the same £2916 available to pay for childcare that your current salary sacrifice arrangement gives you, and you would gain the additional £54.44/year pension accrual that you are losing out on through salary sacrifice. You would however be paying an additional £846.68/year in NI+pension contributions.

So basically if you use tax-free childcare instead of your current salary sacrifice arrangement, you lose out on £846.68 in NI+pension contribution relief each year, to gain £54.44/year additional pension accrual, which would take (again, ignoring above inflation revaluation) about 15.5 years of retirement to regain. If your contribution rate is less or more than 9.3% then this affects the value of Tax Free Childcare compared to salary sacrifice.