Basic questions on pension contributions

Kitty34

I am trying to understand how pension contributions are calculated and have a couple of very basic questions. I would be very grateful for any advice.

I pay 5% of my salary into a pension scheme and my employer also pays 5%. From my payslip I am paying 4% of my gross salary so I assume I am therefore getting the tax relief at source.

Am I correct in assuming that tax and NI is calculated from my gross salary before the pension is deducted, but then the pension contribution is still 4% of my gross salary and not 4% of my net salary?

My employer is offering a salary exchange for pension contributions from next year. What are the advantages compared with relief at source? I am a higher rate tax payer if this makes any difference?

Thanks in advance.

Browntoa

What type of pension scheme is it ?

Final salary DB or something else

JoeCrystal

You are correct in assuming that income tax and NI are calculated from your gross salary before the pension contribution is deducted. However, as you are a higher rate taxpayer, and the fact you are only getting 20% tax relief in the pension scheme, you can reclaim an extra 20% from HMRC (providing it is a DC pension scheme). The advantage of salary exchange or salary sacrifice that it reduced your gross income, so you never paid income tax or NI on the pension contribution. If you are lucky, the employer will share a part of the NI Employer savings on top of your pension contribution.

MallyGirl

salary sacrifice has the benefit of saving you NI as well as tax. Some employers even contribute some or all of the employer NI that they don't have to pay.
As a higher rate tax payer it means you don't have to deal with the pension contributions via a tax return - it all just goes into the pension gross

Kitty34

Thank you. To answer your questions, it isn't a final salary scheme. Yes, my employer is sharing a proportion of the NI contributions, which I assume is the main advantage of this. They also mentioned saving tax but I don't really understand this as the tax is presumably saved with either method.

Albermarle

They also mentioned saving tax but I don't really understand this as the tax is presumably saved with either method

I agree, this should not affect your overall tax position , so not sure what they mean .
Another indirect advantage of salary sacrifice , is that when you have to claim back the higher rate tax relief , it usually ( for most people I think) ends up being spent elsewhere rather than going back into the pension
On a slightly separate note , a total 10% pension contribution , is on the low side . For a higher rate taxpayer specially, pension contributions are normally by far the best way to save for the longer term .

Paul_Herring

Yes, my employer is sharing a proportion of the NI contributions, which I assume is the main advantage of this.

The main advantage is that you don't pay your NI on the contributions as you would with non-sacrifice, and the employer doesn't pay their NI on the contributions either.

The extra employer contribution from their saving in the second part of that sentence is an extra bonus for you.

Kitty34

I agree that my pension contribution is a little on the low side, but I have had years of student loan repayments, high childcare costs and now have a huge mortgage, so I haven't prioritised pension savings. I am considering increasing my pension contributions, but could instead overpay the mortgage??

lisyloo

The tax breaks on pensions are better but you need to bear in mind that you won’t be able to access your pension until 55 (exception fo being ill).
So it’s important to strike the right balance.
If you have spare money then it doesn’t have to be 100% into pension or 100% into mortgage, you can find a balance that suits you which could be 50/50 or any other combination.

Do make sure you have enough accessible for a rainy day
E.g. if you lost your job how much would you need in savings until you got a new job.

Pensions provide great tax breaks but if you are young then the money is inaccessible for all intents and purposes.
If you pay off the mortgage and fall on hard times it’s also inaccessible as you won’t be credit worthy without income.

It’s about striking the right balance sand reviewing when circumstances change e.g. you get a payrise.

Marcon

Kitty34 wrote: »

Thank you. To answer your questions, it isn't a final salary scheme. Yes, my employer is sharing a proportion of the NI contributions, which I assume is the main advantage of this. They also mentioned saving tax but I don't really understand this as the tax is presumably saved with either method.

If you don't understand, ask them to explain.

atush

Kitty34 wrote: »

Thank you. To answer your questions, it isn't a final salary scheme. Yes, my employer is sharing a proportion of the NI contributions, which I assume is the main advantage of this. They also mentioned saving tax but I don't really understand this as the tax is presumably saved with either method.

if you are doing salary sacrifice, instead of saving just BRtax, you also save the additional NICs. So 100 into a pension costs you only 68. that Does NOT take into account what savings from Nics your company is giving you. So you are saving even more.