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

Linton

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)?

The salary cap relates to Gross Salary and to the total of all contributions you make to your pension calculated as gross.

aroominyork said:

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.

And in your case your employee contributions are paid under "net pay" which means the the pension contribution is taken from your gross salary before tax is calculated.  The rest therefore is "taxable".  So the gross amount you could contribute to a personal pension is Gross Pay - (5% X Gross Pay).  So you would actually pay the pension comany 80% of this. Hmrc would pay the missing 20% directl;y into the personal pension.

ColdIron

happybagger said:

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?

A matter for your employer perhaps?

• A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

Were you receiving NMW after salary sacrifice?

zagfles

aroominyork said:

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.

Yes, that fits with Bowlhead's example A, which describes your type of scheme (ie what HMRC refer to as "net pay"). However Bowlhead is wrong where he says there's no difference between gross pay and taxable pay. There is, in a "net pay" scheme like yours. Gross pay is the amount you are assessed for NI on, the amount that is used for stuff like compliance with national minimum wage (which HMRC monitor), also for state benefits like state pension, SMP, SSP, bereavement benefits etc.

Taxable pay is gross pay minus pension contributions, and that's what you're charged tax on.

So as above it doesn't really matter how you look at it. You can use gross pay but then you need to include your workplace employee contributions in your contributions, or you can just use taxable pay as your contributions are already deducted.

zagfles

ColdIron said:

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

Just to clarify this - if you exceed just the earnings limit (eg say you earn £20k and put £25k into a SIPP), you ARE NOT subject to an annual allowance charge, because you've not exceeded the annual allowance. You've exceeded the tax relief limit and that is handled totally differently. You can ask tell your pension provider not to claim the excees tax relief, or you can request a refund of the excess after the end of the tax year.

But it's against the T&Cs of most pension providers to exceed the earnings limit, as it's a hassle for them. 

happybagger

ColdIron said:

A matter for your employer perhaps?

• A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

Were you receiving NMW after salary sacrifice?

No. I was on NMW then my 5% was matched with their 5%. 
Interesting.
The very existence of this of this law surprises me. The fact that my former employer hasn't complied with it, doesn't.

So a salsac arrangement for someone one NMW is not permitted, but a stakeholder equivalent (the firm used Nest for that) is, yet both options takes pay below NMW?

isayhello

bowlhead99 said:

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.

To understand my own pension situation which I thought was a salary sacrifice but now I'm not sure - @bowlhead99
 I pay a certain percentage in and this is matched by an employer. Does this mean it's not a salary sacrifice scheme then as I'm sure my gross pay is listed as the pay before the pension contribution is taken out.

ColdIron

happybagger said:

ColdIron said:

A matter for your employer perhaps?

• A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

Were you receiving NMW after salary sacrifice?

No. I was on NMW then my 5% was matched with their 5%. 
Interesting.
The very existence of this of this law surprises me. The fact that my former employer hasn't complied with it, doesn't.

So a salsac arrangement for someone one NMW is not permitted, but a stakeholder equivalent (the firm used Nest for that) is, yet both options takes pay below NMW?

Salary sacrifice would be unusual for employees on NMW, are you sure that it wasn't a Net Pay arrangement?

This may be helpful

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works

Dazed_and_C0nfused

isayhello said:

bowlhead99 said:

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.

To understand my own pension situation which I thought was a salary sacrifice but now I'm not sure - @bowlhead99
 I pay a certain percentage in and this is matched by an employer. Does this mean it's not a salary sacrifice scheme then as I'm sure my gross pay is listed as the pay before the pension contribution is taken out.

It cannot be salary sacrifice if you do actually pay into the pension.

Salary sacrifice is where you don't contribute anything to the pension but agreed to a lower salary in return for your employer contributing more to the pension.  That is why there is no pension tax relief with salary sacrifice, the personal income tax (and National Insurance) saving comes from having less salary to be taxed (and pay NIC on) in the first place.

Your payslip should show which method is used one way or the other.

If your monthly salary is £2,000 and you contribute 5% under net pay then your taxable pay would be £1,900 and NIC'able pay would be £2,000.

If it is salary sacrifice then your monthly salary would only be £1,900 (for both tax and NIC purposes).

happybagger

ColdIron said:

Salary sacrifice would be unusual for employees on NMW, are you sure that it wasn't a Net Pay arrangement?

This may be helpful

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works

Definitely salary sacrifice defined contribution scheme, gave 100k of death in service benefit too.
Described as Salary sacrifice in the documents, and payslip shows the two (employer and employee) contributions as "SALSAC"

isayhello

Dazed_and_C0nfused said:

Salary sacrifice is where you don't contribute anything to the pension but agreed to a lower salary in return for your employer contributing more to the pension.  That is why there is no pension tax relief with salary sacrifice, the personal income tax (and National Insurance) saving comes from having less salary to be taxed (and pay NIC on) in the first place.

Your payslip should show which method is used one way or the other.

If your monthly salary is £2,000 and you contribute 5% under net pay then your taxable pay would be £1,900 and NIC'able pay would be £2,000.

If it is salary sacrifice then your monthly salary would only be £1,900 (for both tax and NIC purposes).

Thanks @Dazed_and_C0nfused I think it's the Net pay method then because my contribution is matched by the employer but that makes me wonder isn't this situation better than the salary sacrifice because as you say there is no pension tax relief on SS but with net pay, you get the pension tax relief, and the taxable pay is after the contribution is deducted, so all you pay is the NI on the contribution. So it seems you get a bigger saving with this method, is that right?