FT - Tories to raid tax relief pensions

Paul_Herring

KCartwright said:

Could you elaborate on this one please? What is the benefit? I haven't paid any attention to this ever assuming it would all even out by the year end anyway.

Income tax is averaged over the whole year.

National insurance is worked out per-pay-period.

So if you can arrange for lots of your wages to be paid in a couple of months, instead of spread  out over the year, you can take advantage of less of it being NI-taxed at 12% and more at 2%. Or not at all.

Income tax will still average out over the year, however.

zagfles

KCartwright said:

zagfles said:

Anonymous101 said:

This makes any changes hugely problematic IMO. If it were the case that the tax relief changes but not the NI relief I'd consider front loading my contributions to take advantage of the monthly NI calculation and annual tax calculation differences.

You mean you don't already? People here have been doing that that for years!

Could you elaborate on this one please? What is the benefit? I haven't paid any attention to this ever assuming it would all even out by the year end anyway.

Income tax is assessed on an annual basis, but NI is assessed on a pay period basis. If you earn over £50k a year, your tax rate goes up from 20% to 40%, and if you earn over £4167 a month (assuming you're paid monthly) your NI rate goes down from 12% to 2%. So for evenly spread income, the "tax rates" are 32% and 42%.

So say you earn £62k and want to sal sac £12k into your pension to get higher rate relief. You could sal sac £1k a month, and you'd save 2% NI and 40% tax, total relief 42%. 

But if instead you sal sac'ed £3k a month for 4 months of the year, and nothing for the rest, same total sal sac, so tax would be the same, but you'd get £2k of the £3k each month at 12% NI relief, since you go below the £4167 in those months, getting average NI relief of 8.6% instead of 2%, so total relief of 48.6% instead of 42%, saving £800 a year.

Watch out for stuff like the minimum wage (sal sac can't take you below NMW), getting max employer conts (sometimes employer conts rise with employee conts up to a level so ensure you still get max employer conts), and understand how cumulative tax works with PAYE (if you do the big sal sac later in the tax year you'll likely end up paying higher rate tax in the early tax year but will get it back automatically as long as you have a "normal" cumulative tax code). 

If you're expecting a big bonus or overtime, try not to do the big sal sacs in those months, do it when you expect your income to be lower.

Obviously you'll need to budget as your income will be massively different throughout the year.

In Scotland the tax rates are different so will be a bit of a different equation.

Anonymous101

Paul_Herring said:

KCartwright said:

Could you elaborate on this one please? What is the benefit? I haven't paid any attention to this ever assuming it would all even out by the year end anyway.

Income tax is averaged over the whole year.

National insurance is worked out per-pay-period.

So if you can arrange for lots of your wages to be paid in a couple of months, instead of spread  out over the year, you can take advantage of less of it being NI-taxed at 12% and more at 2%. Or not at all.

Income tax will still average out over the year, however.

Conversely if you can manipulate your salary though contributing to a pension through salary sacrifice and are able to concentrate your annual contributions into fewer pay periods, you're artificially lowering your pay and therefore NI. Over the year your tax will even back out but your N.I. will not and you'll therefore pay less N.I. annually.

kinger101

zagfles said:

If you're expecting a big bonus or overtime, try not to do the big sal sacs in those months, do it when you expect your income to be lower.

We have a "benefits advisor" who visits our company every month.  He actually suggested instead of increasing monthly contributions through SS, that I surrender my annual bonus instead.  I did try to draw him a diagram to explain why that was a really bad idea, but seeing he wasn't prepared to believe that NI was charged based on pay period, he didn't understand it.

MK62

My understanding is that such a scheme may fall foul of HMRC's rules on salary sacrifice pension arrangements......

Paul_Herring

Which rules? They scrapped the 'change once a year except for life events' rule quite a while ago. (A quick google search suggests it was when auto-enrolment came in)

MK62

Have a look at EIM42786........example of an unsuccessful salary sacrifice
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42786

I'm no expert here, but I'm not sure I'd want to be in such an arrangement without written approval from HMRC that they view it as a "successful" salary sacrifice arrangement.

zagfles

MK62 said:

Have a look at EIM42786........example of an unsuccessful salary sacrifice
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42786

I'm no expert here, but I'm not sure I'd want to be in such an arrangement without written approval from HMRC that they view it as a "successful" salary sacrifice arrangement.

I think that's just a technicality because the example doesn't involve a contractual change, ie it's the employer simply collecting employee conts rather than implementing a contractual change. Many large employers use sal sac and they'll have jumped through all the legal hoops to make sure it's a successful sal sac, because if it isn't the employer would be hit harder than the employee if it's deemed unsuccessful.

MK62

It would appear to be something of a grey area then........this is Royal London's take on it - 

HMRC also state in their guidance that for an exchange to be successful:
• an employee cannot retain the right to revert back to the higher salary
• it must not be retrospective
• it must constitute an enforceable variation of the employee’s right to remuneration

from https://adviser.royallondon.com/globalassets/docs/shared/guides/ss7-a-guide-to-salary-exchange.pdf - dated April 2019.
How rigourous HMRC enforcement is might also be a factor (at present anyway, but that could change) 

Still, we digress......we should stay on topic really, even though such diversions can throw up some interesting snippets....

ffacoffipawb

MK62 said:

It would appear to be something of a grey area then........this is Royal London's take on it - 

HMRC also state in their guidance that for an exchange to be successful:
• an employee cannot retain the right to revert back to the higher salary
• it must not be retrospective
• it must constitute an enforceable variation of the employee’s right to remuneration

from https://adviser.royallondon.com/globalassets/docs/shared/guides/ss7-a-guide-to-salary-exchange.pdf - dated April 2019.
How rigourous HMRC enforcement is might also be a factor (at present anyway, but that could change) 

Still, we digress......we should stay on topic really, even though such diversions can throw up some interesting snippets....

Regarding the first bullet point, we were allowed to increase or decrease our salary sacrifice pension contributions at my last job.

Does the possibility of decreasing the contribution (reverting to a higher salary, effectively) mean it wasn't a true salary sacrifice then?