Pension Sweet Spot (40% tax)

kinger101

BIK is added onto you're income for tax purposes.  You may be able to get an indication of what the BIK is either from your tax code, or you could login to the government gateway and find out what your employer has told HRMC.  Alterantively, look at last year's P11D.

On the figures you've posted, I'll assume £5K BIK.

Salary before sacrifice		65000
BIK		5000
Less 11% pension		-7150
Taxable income		62850

Which based on those calculations, means £12,850 will be taxed at 40%.  Therefore, you'd pay £10,280 into a SIPP.  This would be grossed up to £12,850.  And you'd get a refund of £3212.50 later on (via tax return or letter to HMRC).

Salary sacrifice would be more efficient, particularly if large parts of your income are bonus.  If your basic is below UEL, there's potential to save both 12% NI and 40% tax.  Your finance director needs shooting if he thinks the company should pay more NI than necessary.

Dazed_and_C0nfused

Which based on those calculations, means £12,850 will be taxed at 40%.  Therefore, you'd pay £10,280 into a SIPP.  This would be grossed up to £12,850.  And you'd get a refund of £3212.50 later on (via tax return or letter to HMRC).

How have you arrived at the £3212.50 figure?

bowlhead99

Dazed_and_C0nfused said:

Which based on those calculations, means £12,850 will be taxed at 40%.  Therefore, you'd pay £10,280 into a SIPP.  This would be grossed up to £12,850.  And you'd get a refund of £3212.50 later on (via tax return or letter to HMRC).

How have you arrived at the £3212.50 figure?

Because he mistakenly took it as 25% of 12850 instead of correctly taking 20% of 12850 

The first 20% of the 12850 was collected and credited as basic rate tax relief by the pension provider in grossing-up the 10280 to 12850, and so a further remaining 20% of the 12850 will be refunded by the taxman to recover the full 40% of tax on the 12850...

SteveyJC

Thank you. everyone for taking the time to reply. Appreciate it very much!

kinger101

bowlhead99 said:

Dazed_and_C0nfused said:

Which based on those calculations, means £12,850 will be taxed at 40%.  Therefore, you'd pay £10,280 into a SIPP.  This would be grossed up to £12,850.  And you'd get a refund of £3212.50 later on (via tax return or letter to HMRC).

How have you arrived at the £3212.50 figure?

Because he mistakenly took it as 25% of 12850 instead of correctly taking 20% of 12850 

The first 20% of the 12850 was collected and credited as basic rate tax relief by the pension provider in grossing-up the 10280 to 12850, and so a further remaining 20% of the 12850 will be refunded by the taxman to recover the full 40% of tax on the 12850...

Yes.  Though I had meant to calculate 25%.  Just of £10,280.  

MEM62

Albermarle said:

It is not a loophole.  It is an allowable and legitimate scheme under HMRC rules.  

A tax loophole is by definition allowable and legitimate .Collins dictionary >>

'a legal way of avoiding the payment of tax, or part of a tax bill, due to a gap in tax legislation'

It is probably a matter of opinion whether Salsac constitutes a gap in legislation, but for sure it was never intended that salary sacrifice would be used on such a large scale for pensions, allowing large scale avoidance of NI payments. One day this loophole/avenue/legislation  will be most likely closed./changed. 

As you have alluded, loophole suggests an gap in legislation or the rules. Successive governments have looked at salary sacrifice for may years and have continued with the rules in their current form.  It would therefore be reasonable to conclude that the scheme is working either as intended or, at the least, in a manner that is acceptable.   

ash82

I think the question for me is, how much can I put in my pension to 'avoid' paying higher tax (i.e. 40%). I do this every year by working out how much I need to put into my pension to avoid the 40% tax rate, for example:
Basic Salary £53,000 pa
Bonus £8,000 pa
BIK £8,000 pa
Total remuneration = £69,000 pa so I need to put £19,000 pa into my pension or 36% of my basic salary to benefit the most from the 40% tax rebate.

kinger101

MEM62 said:

Albermarle said:

It is not a loophole.  It is an allowable and legitimate scheme under HMRC rules.  

A tax loophole is by definition allowable and legitimate .Collins dictionary >>

'a legal way of avoiding the payment of tax, or part of a tax bill, due to a gap in tax legislation'

It is probably a matter of opinion whether Salsac constitutes a gap in legislation, but for sure it was never intended that salary sacrifice would be used on such a large scale for pensions, allowing large scale avoidance of NI payments. One day this loophole/avenue/legislation  will be most likely closed./changed. 

As you have alluded, loophole suggests an gap in legislation or the rules. Successive governments have looked at salary sacrifice for may years and have continued with the rules in their current form.  It would therefore be reasonable to conclude that the scheme is working either as intended or, at the least, in a manner that is acceptable.   

My concern is they'll look again at this rather soon, and decide it's no longer acceptable. I know there's now perennial speculation about salary sacrifice, but there will be more impetus to plug this now due to cost of the current crisis.

MEM62

kinger101 said:

MEM62 said:

Albermarle said:

It is not a loophole.  It is an allowable and legitimate scheme under HMRC rules.  

A tax loophole is by definition allowable and legitimate .Collins dictionary >>

'a legal way of avoiding the payment of tax, or part of a tax bill, due to a gap in tax legislation'

It is probably a matter of opinion whether Salsac constitutes a gap in legislation, but for sure it was never intended that salary sacrifice would be used on such a large scale for pensions, allowing large scale avoidance of NI payments. One day this loophole/avenue/legislation  will be most likely closed./changed. 

As you have alluded, loophole suggests an gap in legislation or the rules. Successive governments have looked at salary sacrifice for may years and have continued with the rules in their current form.  It would therefore be reasonable to conclude that the scheme is working either as intended or, at the least, in a manner that is acceptable.   

My concern is they'll look again at this rather soon, and decide it's no longer acceptable. I know there's now perennial speculation about salary sacrifice, but there will be more impetus to plug this now due to cost of the current crisis.

I think that there is a real risk that will be the case.  It is my opinion that various past Governments have not messed with it so far because the type of individual that this will impact is the kind that makes sure that they vote.    

michaels

If it were removed it would make the unequal treatment of final salary schemes that are not treated as sal sac even more stark as the amount one would need to invest each year to purchase the equivalent annuity is absolutely vast.