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

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)?

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.

So looking at these 2 examples @bowlhead99 it seems that if you are earning over the 40k contribution threshold then neither way makes a difference to how much you can contribute, in both cases the person has 12k already contributed to their annual allowance so there is no benefit in one way or the other? is that correct?

Dazed_and_C0nfused

isayhello said:

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?

No.  You benefit more from the personal tax saving rather than getting pension tax relief like "relief at source".

Say you have monthly salary of £2,500 and 10% goes into your pension.

With net pay £250 is deducted and you pay tax on £2,250 and National Insurance on £2,500.  £250 goes to your pension.

With salary sacrifice you have a lower salary of £2,250 and your employer contributes £250 to your pension fund.  You are taxed on salary of £2,250 and pay National Insurance on £2,250 as well.  £250 goes to your pension (some employers also add some or all of the NI saving they make from you having a lower salary).

With relief at source you would pay tax and National Insurance on £2,500 and then £250 is added to your pension fund and the pension company adds £62.50 basic rate tax relief so you have a pension fund of £312.50.

bowlhead99

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)?

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.

So looking at these 2 examples @bowlhead99 it seems that if you are earning over the 40k contribution threshold then neither way makes a difference to how much you can contribute, in both cases the person has 12k already contributed to their annual allowance so there is no benefit in one way or the other? is that correct?

In those example numbers yes, whether your employer puts in £6k and you put in £6k, or your employer puts in £12k and you put in £0k, you have still used up £12k of the annual allowance you had available. It is generally more efficient for you employer to put in more and you have a lower salary and put in less, because less national insurance is payable if you have a lower salary.  The limiting factor for pension contrbiutions may be your annual allowance if you max it out every year, but most people don't and would have some 'carry forward' available from the previous three years which they could use up if they had a big enough salary or employer contribution, meaning the limiting factor may be how much they earn as an official salary for the year and how much their employer is willing to put in on top of that.

The max that can be put in in total is limited by your annual allowance available (including carried forward annual allowance). 

Within that total limit, the total amount that can be put in as a contribution from you personally is limited by your own gross salary in the current year, while the amount that can be put in as a contribution by the employer isn't separately limited. 

So if you had £60k of available annual allowance and you earned £50k salary, you could get £60k gross into a pension if you contributed £50k and the employer put the other £10k in.   If you had £60k available annual allowance and you earned £55k salary, you could still get £60k gross into a pension if you contributed £55k and the employer put the other £5k in.  If you had £60k available annual allowance and you salary-sacrificed down to £20k salary, you can still put all that gross £20k in and your employer can put £40k in.

aroominyork

If I use carry forward to pay more than £40,000 into a SIPP, do I need to inform my platform and/or HMRC that I am using carry forward in order to ensure I obtain tax relief? Does HMRC's computer track my carry forward and pay tax relief so long as I have 'spare'?

NottinghamKnight

No, you just have to keep sufficient records to be able to justify your pension payments if asked. Assume you are aware of the limit on earnings that you may also be constrained by?

aroominyork

NottinghamKnight said:

No, you just have to keep sufficient records to be able to justify your pension payments if asked. Assume you are aware of the limit on earnings that you may also be constrained by?

Yes, I am aware. You can invest up to the amount of your gross salary taking into account employee workplace contributions and the gross of any other SIPP contributions. There is no carry forward of unused parts of this salary cap limit.

The annual allowance of £40,000 takes into account employer and employee workplace contributions and the gross of any other SIPP contributions. Unused allowance can be carried forward for three years.

Dazed_and_C0nfused

aroominyork said:

NottinghamKnight said:

No, you just have to keep sufficient records to be able to justify your pension payments if asked. Assume you are aware of the limit on earnings that you may also be constrained by?

Yes, I am aware. You can invest up to the amount of your gross salary taking into account employee workplace contributions and the gross of any other SIPP contributions. There is no carry forward of unused parts of this salary cap limit.

The annual allowance of £40,000 takes into account employer and employee workplace contributions and the gross of any other SIPP contributions. Unused allowance can be carried forward for three years.

The pension company, courtesy of HMRC will add basic rate tax relief unless you tell them it is not qualifying contribution.

HMRC will allow any higher rate tax relief if you notify them, either by including the details on a Self Assessment return if you need to file one or by making a separate claim.