Maximum Salary Sacrifice 30 December 2019 at 5:27PM edited 30 November -1 at 12:00AM in Pensions, Annuities & Retirement Planning 25 replies 1.8K views

pensionpawn

Thanks for those links. I've read through plenty of 'guides' on minimum / living wage, most of which suggest that the living wage is the minimum wage (in all bar name) for people aged 25 and over. Guides also state that SS can not fall below minimum wage, which if you are 25 or older, is logically the living wage. However what I'm trying to see written in stone is that for anyone over 24 SS can't fall below living wage (all SS references are to minimum wage only). Cheers...

MoneySavingUser

kinger101 wrote: »

Are you aware of anyone doing this in practice? I'm asking as based on published guidance from HMRC, my employer has indicated it will only alter salary sacrifice agreements after significant life-changing events. I think they're more flexible in practice, but I think it's likely many payroll depts wouldn't allow employees to game the tax system this aggressively.

It used to be only for life changing events but this was relaxed when auto enrolment came in, as limiting changes may affect your statutory ability to opt-in/out of a pension scheme but this wasn't well publicised and most employers haven't updated their policies (I tend to find HR departments are poor at understanding pension provision).


https://www.pwc.co.uk/who-we-are/regional-sites/north-west/insights/pension-auto-enrolment-and-pension-salary-sacrifice-flexible-benefits-become-more-flexible.html

This special legislation now also includes employer pension contributions made under a registered pension scheme via salary sacrifice. This means that there is no longer a requirement (from a tax perspective) to include HMRC accepted “Lifestyle Events” within pension salary sacrifice arrangements. Lifestyle Events are particular events which allow an employee to opt out of the salary sacrifice arrangements before the expiry of the 12 month period, e.g. change of contractual work hours.

Edit: Yes I have done this
Employer 1 - let me change whenever I wanted (every month if I wanted)
Employer 2 - initially said only once every 12 months but then agreed when I showed them the above link to be more flexible
Employer 3 - only lets me change twice a year without a lifestyle event occurring (then more times if a lifestyle event happens)

MoneySavingUser

pensionpawn wrote: »

Thanks for those links. I've read through plenty of 'guides' on minimum / living wage, most of which suggest that the living wage is the minimum wage (in all bar name) for people aged 25 and over. Guides also state that SS can not fall below minimum wage, which if you are 25 or older, is logically the living wage. However what I'm trying to see written in stone is that for anyone over 24 SS can't fall below living wage (all SS references are to minimum wage only). Cheers...

Living wage is the new name for minimum wage. Then for SS purposes it is whatever rate applies to your age (this is an employment law issue not a tax/pensions issue, in that your employer cannot pay you less than this, it isn't specified in tax/pensions legislation as far as I am aware).

michaels

pensionpawn wrote: »

Can I clarify, is the maximum SS (for over 25's) down to minimum or living wage?

I think for over 25s the govt renamed the NMW to the NLW - same thing, new name

Sheriff_Fatmen

MoneySavingUser wrote: »

It used to be only for life changing events but this was relaxed when auto enrolment came in, as limiting changes may affect your statutory ability to opt-in/out of a pension scheme but this wasn't well publicised and most employers haven't updated their policies (I tend to find HR departments are poor at understanding pension provision).

Edit: Yes I have done this
Employer 1 - let me change whenever I wanted (every month if I wanted)
Employer 2 - initially said only once every 12 months but then agreed when I showed them the above link to be more flexible
Employer 3 - only lets me change twice a year without a lifestyle event occurring (then more times if a lifestyle event happens)

Thanks to all for the clarifications.

similar here; I have been in a new job for 5 months and I have already changed the salary sacrifice % three times and can do so anytime, as far as I am aware. I am currently sacrificing 72% and may go further to get down to minimum/living wage. I have also now exceeded this years' 40k limit (most of which was salary sacrificed into my pension via my previous employer earlier this year) in the knowledge that I have some carry-over allowance from previous years.

The main downside with sacrificing as much, is, that you are then legally entitled only to this 'small' salary (because you have sacrificed the rest in order to benefit elsewhere) in the event that you need long term sick leave and any other 'salary' related benefits.

kinger101

MoneySavingUser wrote: »

It used to be only for life changing events but this was relaxed when auto enrolment came in, as limiting changes may affect your statutory ability to opt-in/out of a pension scheme but this wasn't well publicised and most employers haven't updated their policies (I tend to find HR departments are poor at understanding pension provision).


https://www.pwc.co.uk/who-we-are/regional-sites/north-west/insights/pension-auto-enrolment-and-pension-salary-sacrifice-flexible-benefits-become-more-flexible.html

Thanks for the link. I agree entirely with the HR department thing. We actually have a special benefits adviser that visits us monthly. He didn't even understand the pay period thing for NI. He suggested instead of increasing my monthly salary sacrifice that I sacrificed my annual bonus instead.

I had to explain to him how with monthly sacrifice, I was getting both a 40% tax and 12 % NI saving on most my contributions, and that would be reduced to 2% NI if I followed his suggestion. Not sure he believed me, even though he didn't disagree with my working out on paper.

jamesd

kinger101 wrote: »

Are you aware of anyone doing this in practice?

Me. Around five years ago my former employer even introduced an online form to streamline the process.

kinger101 wrote: »

I'm asking as based on published guidance from HMRC, my employer has indicated it will only alter salary sacrifice agreements after significant life-changing events. I think they're more flexible in practice, but I think it's likely many payroll depts wouldn't allow employees to game the tax system this aggressively.

It's illegal for your employer to do that. Once pension auto-enrolment came in seven years ago employers were and are required by law to accept opt out and enrol requests at any time.

This would have banned salary sacrifice pension schemes so HMRC changed the rules seven years ago to permit pension changes at any time, no life event needed. So your employer is at least seven years behind the times. Life events remain needed for non-pension changes.

There is no current published guidance from HMRC requiring life events for pension changes so it's impossible for your employer to base this on any.

For employers who are determined to make their employees pay more NI, combinations of opt out and opt in requests can be used.

HMRC: "It is important to recognise that employers and employees have the right to arrange the terms and conditions of their employment and to enjoy the statutory tax and NIC treatment that applies to each element in the remuneration package. Arrangements, which are designed to make use of these exemptions, should not be regarded as avoidance."

MoneySavingUser

Sheriff_Fatmen wrote: »

The main downside with sacrificing as much, is, that you are then legally entitled only to this 'small' salary (because you have sacrificed the rest in order to benefit elsewhere) in the event that you need long term sick leave and any other 'salary' related benefits.

This can be be employer-dependent, some may base this on your notional pre-salary sacrifice salary.

Sheriff_Fatmen

jamesd wrote: »

While you're limited by minimum wage for salary sacrifice you can also make gross employee contributions up to our gross after sacrifice pay. You'll need to have enough annual allowance or carry forward available for your combined employer (sacrifice) and personal contributions. Your workplace scheme probably provides for this.

So, for over 25yr olds, on a 40hr week (asssume no holidays), current minimum wage = £8.21/hr x 40hr x 52wks = £17076.80

If actual gross salary (before sacrificing) = £50000 (inside basic rate band), then:
Max. that can be sacrificed straight into pension by employer = £50000 - £17076.80 = £32923.20, and:
Max. pension contributions that can be paid by me (from my own savings, post-tax) if full tax relief to be added to the pension:
- (a) if no annual carry-over allowance remaining, = £40000 - £32923.20 = £7076.80, or:
- (b) if plenty of carry-over allowance remaining, = £17076.80

So, in essence, for option (b), the personal income tax liability for the year would equal zero, because everything had been paid into the pension?

Is this allowed?

Dazed_and_confused

So, in essence, for option (b), the personal income tax liability for the year would equal zero, because everything had been paid into the pension?

Contributions to a relief at source pension scheme (SIPP, personal pension or stakeholder) will have no impact on your personal tax liability. They do not reduce taxable income, they increase the amount of basic rate tax payable.

So for someone earning £17076 they will still need to pay c£915 in income tax. This assumes they haven't applied for or are the recipient of Marriage Allowance and are UK resident for tax purposes.