Salary sacrifice vs auto enrollment

I am trying to figure out a difference between salary sacrifice pension I have and auto enrollment for one of my relatives. We both say we contribute 20% but the figures look very different. 

To simplify the example, say we both earns 100K gross, full time employment. I don't know his exact figures so I used a salary calculator.  My pension deduction is 20K, and his is £8,752. I pay £19,500 tax and he pays £23,999. I take home £55,040 and he does £61,388. So I end up with £11K more in my pension pot, and pay 4K less in taxes. However, I take home 6K less. It looks to me that my pension is more beneficial, as even if he adds these 6K (difference bw our take home) to his pension pot, he still ends up with less pension amount. Or does he need to claim additional tax relief to make his pot size similar to mine?  I've been on salary sacrifice for a long time so I wasn't paying attention to other options, but it seems like his is more complicated. We are discussing of what is best to do to increase his pension pot in an efficient way.
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  • JoeCrystal
    JoeCrystal Posts: 3,267 Forumite
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    It depends if his employer uses the absolutely minimum auto-enrolment, which is a percentage of a band between £520 to £4,167 per month. So in theory, his employer doesn't have to contribute anything above £4,167 per month.
  • Once of the complexities with comparing things like this is that you aren't contributing anything to a pension.

    You are giving up some of your salary in return for your employer contributing to the pension.  Which is why there is no pension tax relief with salary sacrifice.

    His auto enrolment contributions are probably into a relief at source scheme so qualify for a 25% uplift so if he contributes £100 then £25 tax relief is added to the pension fund.
  • hugheskevi
    hugheskevi Posts: 4,429 Forumite
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    edited 11 November 2020 at 4:50PM
    btcp said:
    I am trying to figure out a difference between salary sacrifice pension I have and auto enrollment for one of my relatives. We both say we contribute 20% but the figures look very different. 
    Salary sacrifice and automatic enrolment are completely separate things. Automatic enrolment is the obligation of an employer to enrol employees into a qualifying scheme. Salary sacrifice is one of several possible options by which pension contributions can be made. So an automatic enrolment qualifying scheme can use salary sacrifice, for example.
    I've been on salary sacrifice for a long time so I wasn't paying attention to other options, but it seems like his is more complicated. We are discussing of what is best to do to increase his pension pot in an efficient way.
    Employers all have different pension scheme and contribution rates so it is difficult to make direct comparisons.
    There are 3 common ways in which member contributions are deducted:
    (1) Net pay - deductions taken prior to operation of PAYE and sent to provider. All tax relief due is automatically awarded
    (2) Relief at source - deductions taken after the operation of PAYE and sent to provider. Basic rate relief added automatically by provider. Higher/additional relief has to be claimed from HMRC by the member.
    (3) Salary sacrifice - member salary is reduced in exchange for employer making higher pension contributions. As salary is not paid, there is no relief to claim. 
    The methods all give the same amount of income tax relief, it is just how it is awarded that varies. Salary sacrifice also results in lower National Insurance contributions, and the employer may add some of the employer National Insurance contributions saved to the contribution.
  • btcp
    btcp Posts: 310 Forumite
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    edited 11 November 2020 at 5:01PM
    His auto enrolment contributions are probably into a relief at source scheme so qualify for a 25% uplift so if he contributes £100 then £25 tax relief is added to the pension fund.
    Ok I see, but even if we add 25% his pension pot is still much smaller than mine. Does it mean that in his pension scheme he needs to contribute almost a double % to arrive to a similar amount to mine? I understand that sacrifice scheme is totally different by nature, just trying to understand how he can get to the same amount as mine per annum - both pension pot and take home. 
  • btcp
    btcp Posts: 310 Forumite
    Part of the Furniture 100 Posts Photogenic Name Dropper
    Salary sacrifice and automatic enrolment are completely separate things. Automatic enrolment is the obligation of an employer to enrol employees into a qualifying scheme. Salary sacrifice is one of several possible options by which pension contributions can be made. So an automatic enrolment qualifying scheme can use salary sacrifice, for example.
    thank you, that's clear that by nature they are different things. but the aim is the same - to save money for pension. what I am trying to figure out is how he can save save the same amount of pension that I do, while taking home the same amount. 
  • MallyGirl
    MallyGirl Posts: 7,148 Senior Ambassador
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    given that sal sac saves you NI and no other method does then it won't be possible for you to achieve complete parity
    I’m a Senior Forum Ambassador and I support the Forum Team on the Pensions, Annuities & Retirement Planning, Loans
    & Credit Cards boards. If you need any help on these boards, do let me know. Please note that Ambassadors are not moderators. Any posts you spot in breach of the Forum Rules should be reported via the report button, or by emailing forumteam@moneysavingexpert.com.
    All views are my own and not the official line of MoneySavingExpert.
  • btcp said:
    Salary sacrifice and automatic enrolment are completely separate things. Automatic enrolment is the obligation of an employer to enrol employees into a qualifying scheme. Salary sacrifice is one of several possible options by which pension contributions can be made. So an automatic enrolment qualifying scheme can use salary sacrifice, for example.
    thank you, that's clear that by nature they are different things. but the aim is the same - to save money for pension. what I am trying to figure out is how he can save save the same amount of pension that I do, while taking home the same amount. 
    I don't think that's possible.

    You have an inherent advantage that salary sacrifice is saving you National Insurance as well as income tax.

    And you can be quite specific about how much you want your employer to contribute on your behalf whilst auto enrolment has bands which can limit the amount both the individual and employer contributes.
  • hugheskevi
    hugheskevi Posts: 4,429 Forumite
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    edited 11 November 2020 at 5:55PM
    btcp said:
    Salary sacrifice and automatic enrolment are completely separate things. Automatic enrolment is the obligation of an employer to enrol employees into a qualifying scheme. Salary sacrifice is one of several possible options by which pension contributions can be made. So an automatic enrolment qualifying scheme can use salary sacrifice, for example.
    thank you, that's clear that by nature they are different things. but the aim is the same - to save money for pension. what I am trying to figure out is how he can save save the same amount of pension that I do, while taking home the same amount. 
    Note that your example and calculator values implicitly assumes a net pay scheme for the other person.

    The difference in take home is £6,348. Grossed up with higher rate relief that is £6,348 / 0.6 = £10,730. Add that to the £8,752 initial contribution, and the total contribution is £19,482.

    Due to using salary sacrifice, you save £400 on individual National Insurance contributions (which affects take home). Even if everything else matched perfectly, this inequality would persist due to the difference between net pay and salary sacrifice contributions. Add that £400 difference to the take home pay difference that goes into a pension (ie £6,748) and the total contribution becomes £20,000.
  • Brynsam
    Brynsam Posts: 3,643 Forumite
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    edited 11 November 2020 at 6:18PM
    btcp said:
    Or does he need to claim additional tax relief to make his pot size similar to mine?  
    I'm assuming you both earn no more than £100,000?

    He can claim additional tax relief (to the extent he's paid higher rate tax in the first place). 
  • Albermarle
    Albermarle Posts: 27,005 Forumite
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    If you are both higher earners and paying 40% tax it might be related to that .
    As you contribute by salary sacrifice , then you get higher rate tax relief automatically , as you do not pay any tax on your pension contribution in the first place .
    If he is on a Relief at source scheme , the pension provider will add basic rate tax relief but he has to claim back the higher rate relief from HMRC . Does he do that ? Hopefully he does or he has been losing a few grand every year.
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