Salary Sacrifice to lower tax bracket?

ByondDoubt

Hello there,
I would just like to ask the more knowledgeable people in this forum if I have my understanding correct, and if not what is actually the case.

I am currently in the 40% tax band, and am currently salary sacrificing around £300 a month to my pension.
If I were to increase this by an additional £1,100 a month (£13k p/a) this would bring me down to below £50k p/a.
As the majority of this £13k is currently in the 40% range that would mean I am not paying £5.2k tax.
Once I start claiming my pension I will get 25% of this back tax free (£3.25k)
On the remaining 75% I will pay 20% tax, assuming I keep my income to less than 50k p/a (taxable amount £9.75k, paying £1.95k in tax)
So the paid tax would drop from £5.2 to £1.95k, putting £3.25k back into my collective funds.
As I have dropped below £50k p/a pay, then I would also be able to claim 100% of the child allowance for the one child I still have at school, £1.1k p/a.
There would also be other benefits, such as increase in saving earnings from £500 to £1000 before tax (not relevant with the current interest rates); lower tax on dividend payments (again n/a to me); and lower tax on CGT (unlikely to be relevant).

So, firstly I am wondering if my understanding of the above is correct, and secondly if there are more efficient ways of using the £1.1k a month.
Thanks.

Paul_Herring

So, firstly I am wondering if my understanding of the above is correct, 

I can't see anything obviously incorrect there. However...

As the majority of this £13k is currently in the 40% range that would mean I am not paying £5.2k tax.

Is your scheme Salary Sacrifice, or Net-Pay? (edit: just noticed - you actually said SS)
If SS, you're also saving NI (2% on wages above £50K, 12% on that below) on the amounts contributed.
If NP, you'll need to claim back half of the tax from HMRC at the end of the tax year, since you'll only be getting 20% tax relief on money going into the pension.

and secondly if there are more efficient ways of using the £1.1k a month

Unless you need it for something else before you reach the age at which you can start withdrawing from the pension (55/57/58) not really.
Presuming, of course, you have no high-interest debts to pay off, you have an emergency fund, and all the other bits an pieces before heavily contributing to pensions on the UKPI flowchart.

zagfles

You've pretty much summed up the tax advantages of a pension.

Others are you save a little NI, and if you're married and your spouse doesn't earn, or earns less than the personal allowance, you could make use of the marriage allowance. Could also get more in childcare vouchers if applicable.

If you want to take it to an advanced level, you'd sal sac the same amount over the year but in a lumpy way, as the NI rate is 12% up to £4167 a month (ie £50k/12) and 2% above that, and it works on a pay period basis unlike tax which works on an annual basis. So if you sal sac evenly to take your annual taxable pay down to £50k pa/£4167 a month, you get 40% tax relief and 2% NI relief.

But if you sal sac unevenly, ie the same amount over the year but the majority concentrated into a few months of the year, you could get 12% NI relief on most of the money while still getting 40% tax relief. Discussed here a lot - watch out for maintaining any minumum level to get max company contributions, and you can't sal sac below the minimum wage. Depends of course how often your company allows changes in sal sac, I think most now allow monthly changes.

CRAIGSVILLE1

Yep, this is exactly as I do, but I live in Scotland, so I salary sacrifice to £43500 to get rid of that dirty 40% ( 41% in Scotland ) tax band.
With the savings rate, as I  found out a couple of years ago, stays at the higher tax rate, so would still only be £500 interest for you before taxed.

https://www.thesalarycalculator.co.uk/salary.php

Craig

Dazed_and_C0nfused

If NP, you'll need to claim back half of the tax from HMRC at the end of the tax year, since you'll only be getting 20% tax relief on money going into the pension

You cannot claim tax relief from HMRC in respect of net pay contributions.  

You receive the maximum possible tax relief at the point the deduction is made so there is never anything further to claim from HMRC.

This applies even if it appears that only 20% relief is being received i.e. two jobs each paying £30k and net pay contribution on one receives 40% tax relief even if it appears that only 20% relief is being received.

Paul_Herring

You cannot claim tax relief from HMRC in respect of net pay contributions.  

Ugh, of course. Blame the cheap wine I'm being forced to drink during Lockdown™...

Paul_Herring

CRAIGSVILLE1 said:

With the savings rate, as I  found out a couple of years ago, stays at the higher tax rate, so would still only be £500 interest for you before taxed.

I thought that was based upon your income tax band after pension contributions?
The link you provide doesn't address the savings allowance.
  This link suggests that dropping your gross wage, through pension contributions, below £50K will increase your allowance back to £1,000:

The amount of your personal savings allowance depends on your ‘adjusted net income’. Adjusted net income is your total taxable income (including savings income and dividends) less certain tax reliefs, for example Gift Aid donations and pension contributions.

ByondDoubt

Thank you for the response, it is all much appreciated.
I was looking for confirmation on my understanding of what the pension increase offered over sending the money to a ISA.

Paul_Herring said:

Unless you need it for something else before you reach the age at which you can start withdrawing from the pension (55/57/58) not really.

Presuming, of course, you have no high-interest debts to pay off, you have an emergency fund, and all the other bits an pieces before heavily contributing to pensions on the UKPI flowchart.

I am 51 now and although I aim to work until 62, but knowing that I could potentially access it in four years should plans change means the concerns about the time the money is inaccessible is less of an issue.

There are no other pressing issue's in terms of debt to deal with, and a small emergency fund will be set aside.

zagfles said:

You've pretty much summed up the tax advantages of a pension.

Others are you save a little NI, and if you're married and your spouse doesn't earn, or earns less than the personal allowance, you could make use of the marriage allowance. Could also get more in childcare vouchers if applicable.

I came late to thinking about my finances; just over a year ago when recovering from a hernia. I don't trust myself to have anything other than a basic understanding!

Although, as I found a pension at that time that had been long-lost from moving houses previously, I can strongly advise anyone who reads this that it's never too late to try to take control (and as I now try to inform my son, it's never too early).

But if you sal sac unevenly, ie the same amount over the year but the majority concentrated into a few months of the year, you could get 12% NI relief on most of the money while still getting 40% tax relief.

Great new piece of information, thank you. I will definitely be looking into this, and discussing fluctuating pay packets with the wife.

And thanks for the links to supporting info; the more I read the better I understand.

cloud_dog

OP, this is a worked example I did for a colleague regarding the benefit of 'lumpy' contributions over evenly spaced month contributions.  Please note, I have cheated slightly by assuming the standard employee percentage is also wrapped up in the 'lumpy' example/benefit, which isn't correct as this would have to remain over 12 months.

National Minimum Wage (20/21) for aged 25 and over is £8.72.  Standard No. of hours for monthly PAYE calculations 162.5,  NMW per month = £1408.28.

Monthly NI band rates are: 

• 0% from £520 to 792
• 12% from £792.01 to £4167.00
• 2% above £4167.00

So, assume a monthly salary of £6000 (£72k pa) and you want to put £1500 a month (£18k pa) in to your pension; to make life easier I am including any existing workplace scheme percentage contribution within the £1500pm. 

12 Equal Contributions

All the £18k / £1.5k pm would benefit from full HRT savings so:

• £1500 * 40% (HRT) = £600.00 
• £1500 * 2% (HRT NI Band) = £30.00
• None in the lower 12% NI rate band
• Deduction (for want of a word) = £630.00
• Reduction of £1500 contribution in to pension is net £870pm (reduced salary)

Annualised deductions: £870 * 12 = £10440

4 Contribution Months

All the £18k / £4.5k pm would benefit from full HRT savings so:

• £4500 * 40% (HRT) = £1800 
• £1833 * 2%  (HRT NI Band) = £33.66
• £2667 * 12% (BR NI Band) = £320.04
• Deduction Cost = £2153.70 per payment.
• Reduction of £4500 contribution in to pension is net £2346.30pm (reduced salary)

Annualised deductions: £2153.70 * 4 = £8614.80

Saving of £1825.20pa

Equivalent of a deduction rate of 47.8% rather than standard SS rate of 42% (HRT and NI).

ByondDoubt

cloud_dog said:

OP, this is a worked example I did for a colleague regarding the benefit of 'lumpy' contributions over evenly spaced month contributions. 

Saving of £1825.20pa

Thank you for this explanation.
I'll be honest, I had to read through it twice...slowly, but I get it!
Now to open up discussions about the benefit of having four months of very low pay.

Paul_Herring

Now to open up discussions about the benefit of having four months of very low pay.

It'll get you used to that level of income when you come to take your pension...