SIPP annual allowance and salary cap - gross or net of tax?

ColdIron

MaxiRobriguez said:

You also are limited to contributions that do not take you under minimum wage. So someone on a £40k salary doing a standard working week can only make contributions up to about £23k annually into their pension.

This is a limit on salary sacrifice and is not a limit on pension contributions as such. You can't reduce your salary to below minimum wage

Think about it, you could be funding your contributions from savings

milton1970

Are you limited to the value you can add to your SIPP or it it just that the tax credit / relief is limited ? 

Albermarle

milton1970 said:

Are you limited to the value you can add to your SIPP or it it just that the tax credit / relief is limited ? 

It is just the tax relief that is limited . However it is pretty pointless adding to a SIPP and not getting tax relief, as the pension is taxed on the way out . You would be much better off investing it outside a pension in this case.
Also the providers usually add tax relief automatically , so would be a mess to sort out .

ColdIron

milton1970 said:

Are you limited to the value you can add to your SIPP or it it just that the tax credit / relief is limited ?

You would be subject to a tax charge, known as the annual allowance charge (AAC)

https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge

But as pointed out, without the relief there isn't much point to pensions. They are outside your estate I suppose but there are probably less messy ways to achieve that

dunstonh

MaxiRobriguez said:

You also are limited to contributions that do not take you under minimum wage. So someone on a £40k salary doing a standard working week can only make contributions up to about £23k annually into their pension.

That only applies to salary sacrifice.  Individual contributions not using salary sacrifice would be used in that scenario.

MaxiRobriguez

dunstonh said:

MaxiRobriguez said:

You also are limited to contributions that do not take you under minimum wage. So someone on a £40k salary doing a standard working week can only make contributions up to about £23k annually into their pension.

That only applies to salary sacrifice.  Individual contributions not using salary sacrifice would be used in that scenario.

Sorry yes, for some reason I thought that's what we were talking about!

aroominyork

And just to check, the salary cap relates to gross salary and not to gross taxable salary (the difference being the amount deducted for employee's pension contribution)?

bowlhead99

aroominyork said:

And just to check, the salary cap relates to gross salary and not to gross taxable salary (the difference being the amount deducted for employee's pension contribution)?

There is no difference between 'gross salary' and 'taxable salary' because salary you receive from an employer is taxable, full stop (subject to personal allowances).  You are presumably talking about the difference between the new, reduced salary that the employer and employee agree that the employee will get after a sacrifice arrangement has taken place, versus the higher notional salary that the employer would have been willing to pay to the employee if the employee had not wanted to get so much pension from the employer.

In a salary sacrifice scheme, the employee often doesn't make a pension contribution (unless he chooses to). Instead they sacrifice some salary and don't take it as salary. They literally GIVE UP (sacrifice) the right to receive salary on the understanding that the employer (who will thereby incur lower salary costs) will be able to afford to use the employer's own funds to instead make a greater employer pension contribution, instead of giving the employee some salary. The salary is officially reduced to a lower number. What salary is left, is fully taxable as salary.

If the workplace pension is fed entirely from employer contributions using the money free'd up from a sacrifice arrangement, the employee is not putting any of his 'new' salary into a pension. The extra amount of salary he could have had, is not his salary, because he didn't want it - he sacrificed it. So the total amount of salary he does get, is the salary that is counted when his is looking at 'what is my salary cap'.  The full amount of that salary (which I think you are describing as 'gross taxable salary', but from HMRC perspective is simply 'his salary') is the amount that would be considered as functional cap on how much gross personal pension contribution he could make for the year.

Simple example:
A) No sal sac:
Employee gets £60k salary ; Employer willing to pay £6k into pension ; Employee puts £6k into pension out of his £60k salary. Employee has used up £6k of the £60k gross 'salary cap'. When considering what extra personal contributions he can make, he could do £54k gross without going over the salary cap, but would have to take into account the £6k employer and £6k employee contributions already made in the context of the annual £40k allowance and any carry forward allowance available from previous years.

b) With sal sac:
Employee contractually agrees to sacrifices £6k of his salary leaving himself with only £54k salary ; Employer now willing to pay £12k into pension ; Employee puts £0k into pension himself out of his £54k salary. Employee has used up £0k of the £54k gross 'salary cap'. When considering what extra personal contributions he can make, he could do £54k gross without going over the salary cap, but would have to take into account the £12k employer contributions already made in the context of the annual £40k allowance and any carry forward allowance available from previous years.

When a sal sac method is being used it is often still possible for the employee to make extra contributions beyond the amount that went into the pension via the sal sac method. In that those extra employee contributions would simply count towards the £54k salary cap on contributions from (B) above, just like they would have counted towards the £60k cap on contributions from (A) above.

happybagger

ColdIron said:

This is a limit on salary sacrifice and is not a limit on pension contributions as such. You can't reduce your salary to below minimum wage

I left my last job in August which was paid hourly at NMW, yet I was paying 5% of my pay via salsac into the works pension (they matched but only to a max of 5%)

Was this not legal then?

aroominyork

Thanks bowlhead.

I am not talking about salary sacrifice. My payslip shows "Total Gross Pay TD" and then "Gross for Tax TD". The latter amount is 95% of the former amount. We do not operate salary sacrifice but have a pension scheme whereby employees pay in 5% (and the employer 6%). Hence gross salary and taxable seem, from the payslip headings, to be two different figures.