Salary sacrifice question - specific to me

Mick70

I didn’t want to hijack joes thread so thought would post my own Specific  query .
 I am wondering if should ask FD if will consider salary sacrifice scheme for our works DC pension . 

Currently my salary is £63k. 

I pay in employee 13% (including the govt top up ) and employer pays in max allowed of 16%. From next month I may up mine to 15% giving combined 31% , or £18k going into
Pension pot each year . 

I also have a triggered final salary pension come end of May that will be £26.7k per year and want to get as much of this as possible into my dc pot . It will be taxed at 40% leaving £16k hitting my bank , so in theory I can get this in and the govt top up would bring it up to £20k I think anyway ??  Meaning over a year I should be able to get in £38k (18+20) if my calcs here are right ?  Then can also claim tax back on following years tax return (unsure how much ).
does all that sound right ?
so , if used salary sacrifice would I be better or worse off ? Could I still get all my final salary pension into my DC pot ?  I don’t want to suggest it then find it doesn’t work for my circumstances ?
any help with this greatly appreciated,
mick 

kinger101

With salary sacrifice, you're not putting your final salary pension into the scheme.  Your surrendering salary, which your employer is agreeing to pay into your pension on your behalf.  Salary sacrifice is always the most tax efficient option, as you're saving national insurance in addition to income tax.  Though for HR taxpayers, it's only a slight gain, as the NI is only 2 percent and not 12 % (unless a significant portion of your salary is annual bonus).

Based on the figures you've posted £63K salary plus £26,700 in pension totaling £89,700.  Over £50K everything is taxed at 40%, which you want to avoid.  To do this, you'd need to reduce your salary to £23,300, which is still above minimum wage (you can't sacrifice below this).

So you'd 
(a) need to get your employer to implement SS
(b) increase the salary sacrifice amount from 13% to 63% of your salary.

There is a caveat here - if you receive a tax-free lump sump with your pension, you may fall foul of the "pension recycling" rules.  I'm not 100% sure on this, but someone on the forum probably will be.
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-lump-sum-recycling
If you do, some final salary schemes allow you to surrender the lump sum in return for higher pension.

Even if you can't get salary sacrifice, it's still worth putting extra into pension to mitigate the 40% tax (assuming you wont pay this in retirement). 

Mick70

Thanks that makes more sense now , I would only ever want to reduce my salary by 40k anyway as after that there is no tax benefit , luckily in this example that ties in with asking for salary to be reduced from 63 to 23. 

I would then be left with 23k Sal and 26.7k pension = 49.7k income, unsure how I would work out my net pay from this as dont pay NI on the pension element , just to ensure I’m def not out of pocket 😆..    thank you for reply 

kinger101

Actually, with salary sacrifice, there is still a considerable benefit with reducing salary taxed a basic rate due to the 12 p national insurance saved.  Assuming a marginal income tax rate of 15% on retirement income, for every £1 in your pension pot, you get 85 p net back.  However, this only costs you 68 p of net salary.  So you get +25% (17 p) free.  For HR, it's 58 p for 85 p, which is +46.55%

DT2001

If you SS from £63 to £23k won’t your employers contribution take you over the £40k limit unless you can carry forward from previous year(S)?

Mick70

DT2001 said:

If you SS from £63 to £23k won’t your employers contribution take you over the £40k limit unless you can carry forward from previous year(S)?

Ah right so you need to build in employers contributions also ? How would that work as currently our employer doubles our contributions up to a maximum of 8% employee / 16% employer ?
thanks 

Mick70

I’m getting there I think !
so if employer contributes 16% still (£10k) , it means I reduce my salary by £30k to get in the full £40k annual allowance ? And any more than that is pointless ?
this would then leave me with salary of £33k and DB pension of £26.7k , so combined almost £60k where normal tax and ni rules would then apply (no ni on pension ?).  Unsure what take home monthly pay would be from that though.
anyone confirm my calcs are right ?
many thanks for help ,
mick 

DT2001

£40k combined (you and employer) is maximum for relief unless you can carry forward from previous tax years. As you had a DB pension you’ll need to ask the administrator of the scheme, I think, to find out the figure.
Take home pay will depend on your tax code however you can use online calculator as some allow you to split income from different sources.

Mick70

Many thanks 

Mick70

ignoring the salary sacrifice part of query as think understand how that works now and also the FD doesn't seem keen at moment (I think he was under impression it would need to be in place before april pay , but i dont think that is the case)

salary will be £64k from April.      

I pay in employee 15% (including the govt top up ) and employer pays in max allowed of 16%, giving combined 31% ,£19.8k into
Pension pot each year . 

The complication is as follows  :-
I will also have a triggered final salary pension come end of May that will be £26.7k per year and want to get all of this If possible into my dc pot . It will be taxed at 40% leaving £16k hitting my bank ,   So, i want to increase my employee contributions by this £16k And the government top up = £20k  (this would equate to 31% of my £64k salary ?).

So,  once this pension kicks in I think I need to ask for my contributions to become 46% (including govt top up) -  is that correct ?

this will then pay into my pot ,    16% employer and 46% employee (incl govt top up) = 62%= £39.6k pa 

Then can also claim tax back on following years tax return (unsure how much ).


Can anyone kindly confirm that my calculations would be correct ,  please

JoeCrystal

Your calculations do make sense although I am not sure if you are paying pension contributions before taxes or after taxes. Do you get tax relief added on by your pension provider?