What % does it cost you? (What % do you pay?)

Bemma

As an aside to the very interesting thread on What % do you pay?

What % does it cost you?

I get 28% (20% me + 8% emp) of my salary into my pension and it costs me 5.6% of my net salary.

I.e. I currently contribute £15493 into my pension and it cost me £3372. So the cost to me is 21% of the contributions, which I consider a very good deal.

This is not a trivial calculation: As I increase my salary sacrifice, I drop from 40%->20% tax, 2%->12% NI and also HICBC taper and not all at the same salary boundaries, as I receive a bonus and therefore non uniform monthly remuneration.

Depending on which way you look at it, I'm either in the terrible position of having an extremely high effective marginal tax rate or in the excellent position of getting a large chunk of that back though tax/NI/HICBC relief.

I found this a very informative exercise to work out how much my contributions were costing me in actual net salary deduction and has made me think that I should maybe pay in more. As it's not really costing (net) in that much!

Here's the detail for me… Salary £52700, annual bonus £7300, 2x child benefit rounded to £1800 per year. I contribute through salary sacrifice and my company tops up my contributions with 7% of Employer NI.

First £6471.56
This is 4% contribution: £2,108.00. @Tax 40%, NI 2%, HICBC 18% = 60% relief
Double matched by my company 8% = £4216.00
Plus 7% employeer NI on my contribution 7%: £147.56
Total: £6471.57
Cost to me 4% = £2,108.00 less 60% = £843.20

Next £9022.24,
This is almost all at 12% NI, as the first 4% drops my salary to £50k-ish, but still 40% tax and 18% HICBC apply as my annual salary is still over £50k because of my annual bonus.
Tax 40%, NI 12%, HICBC 18% = 70% relief
16% contribution: £8432.00
Plus 7% employer NI on my contribution 7% = £590.25
Total: ££9,022.24
Cost to me £8,432.00 less 70% relief = £2,529.60

So in total £ £15,493.80 for £3,372.80 cost in net salary, or a 'Pension Factor' of x4.59. This figure actually surprised me. I knew it was a good deal with SalSac to put my 40% bracket earnings in my pension, but working out the figures I can see how good it really is. My first 4% has a Pension Factor of x7.68 due to the employer double matching and relief. My next 16% has a Pension Factor of x3.57 due to effective Tax/NI/HICBC relief. I've worked out that further contributions will 'only' attract a x1.57 Pension Factor.

Paul_Herring

Me 66%, employer 7.1%, net pay reduced by 60%.

Albermarle

You are in a 'sweet spot' where you are able to take advantage of salary sacrifice to get tax relief, NI relief. a generous employer who gives you the NI saving , plus you have children under 18 .
Although I also have salary sacrifice , the only benefit is the 2% NI saving as my employer keeps their NI saving and my children are over 18. Of course I get 40% tax relief but I would get this anyway.

To be honest I am surprised that the loophole of salary sacrifice for pension payments has not been closed down. I am sure it will be one day as it is growing source of lost revenue for HMRC.

Bemma

You can say I'm in a sweet spot being able to take advantage of the reliefs available, but on the flip side, you could say it's a 'black spot' to have a very high effective marginal tax rate of 70%.
But I doubt I would be contributing to the level that I am if my 'pension factor' wasn't so high. If 40% tax and HICBC didn't exist, I would be very tempted to keep and spend more money now! That would be a bad thing...
So I'll be thankful for this sweet spot and hope that it continues... I'm surprised too that this has not been closed down, I think the general lack of knowledge about this keeps it under the radar.

JoeCrystal

Unfortunately, my employer doesn't offer salary sacrifice, but when I was on low wage in the past, I used to be on Working Tax Credits. At the time, Working Tax Credit did not take into account of your capital, so it was straightforward to contribute a right proportion of your salary into the pension scheme. You then report to the DWP/HMRC that you are on lower-wage and get an increase in your WTC. It was convenient although it can be a hassle since DWP/HMRC chase you after getting conflicting information from the employer and what I put down and send them proof that I paid into a personal pension.

In theory, you can do the same with the Universal Credit, but it now got capital rules which mean you can't claim it if you got more than £16,000 and if you got more than £6,000, it assumed you get £4.35 per month for each additional £250 above £6,000.

So if I managed to run down my savings to below £6,000 for example and I am on £28,200 salary and paid £18,612 gross into the pension scheme in a year, I would get £1,233.96 UC in a year.

So mostly, the pension gets £18,612 in a year and would cost me £13,656, so I will be getting a 36% increase rather than 25%. But alas, I got other commitments, but it is possible.

jimi_man

I was an agency worker for a few years recently, and I was able to pay all of my earnings above 40% (about £20k) via salary sacrifice and with the 12% NI savings it gave me a 52% savings in total. No employer contribution but as I'm using it primarily as a savings plan, and will make sure I only pay 20% tax in retirement, it still represents a 32% return - leaving out any investment returns.

ex-pat_scot

I contribute 23% under sal sac. £10,815 approx. of foregone pay packet.
With er contribution the gross in my annual DC pot is £40,211.


That's an effective contribution rate of 32.5% of gross salary.

My £10,815 of foregone cash (£900 per month) turns into £40,000 of pension. When I come to draw it down, up to the limit of BR each year, it will be at a 15% marginal tax rate. So I will get £34,000 of my £40,000 back, ie £2,850 per month.


Thus my hefty £900 per month cash foregone will magically turn into £2,850 once I access it from my pension.

There's the small matter of 4.5 years of deferred gratification before I can actually access this though, but it's still a pretty compelling argument to max out the pension!.