Salary sacrifice pension / pension or mortgage overpayments

slider09

Hello all,
I have two questions if I may?
1. My pension through work is a salary sacrifice scheme.  My question is, according to HMRC what is my actual salary?  Is it my full salary before my pension is 'sacrificed' or the amount once I have sacrificed my pension.  For example, for ease of maths, if I were on £20,000 per year and paid 10% into my pension as a salary sacrifice, would HMRC deem my salary to be £20,000 or £18,000?

2. Currently I pay 15% of my salary into my work pension, pay an amount into an old 'with profits' scheme which was started 25 years ago and make mortgage over payments?  What is generally considered the 'best' thing to do, pay as much into your pension, or pay as much into you mortgage.  If the latter, I could reduce my contributions into my two pensions and pay the maximum permitted of my mortgage (10% of the balance each year).

Thank you

Dazed_and_C0nfused

HMRC aren't normally interested in your "salary" as it has little meaning for tax purposes.

For income tax they need to know your taxable pay (the pay amount which would be shown on your P60).

In 1 this would be £18,000. 

However in this situation you wouldn't have contributed anything to a pension.  You have given up 10% of your salary in return for your employer making an employer contribution of £2,000 into your pension.  That is why there is no pension tax relief with salary sacrifice - the contributions are employer not employee.

cloud_dog

1. £18k
2. Is a psychological decision.  Financially, with interest rates so low, you are likely to be better off investing the money.  The only caveat is if you currently have a high(ish) LTV ratio, it may be worth overpaying so as to benefit from better mortgage rate offers when you come to remortgage.

CSL0183

You would say you earn £20k to a mortgage lender. 

Your income for HMRC including any benefit applications etc would be £18k.

Many people on say £55k will salary sacrifice £5k into their pension funds to satisfy the £50k child benefit cap for example. 

atush

Pension

steampowered

You get tax relief on pension contributions. You do not get tax relief on mortgage overpayments.

Pension contributions generate investment returns. Check where your pension is invested, but a typical stock market investment would return on average 7-8% per year over the long term.

Mortgage overpayments save interest. The interest you are paying on a competitive mortgage is probably somewhere between 1-2%.

Pensions are the clear winner, as long as you are happy to lock the money away until retirement.

Bemma

Compare the sums by example:

Say you overpaided your mortgage buy £100 at the start of a 25 year mortgage at say 2% apr.  That would initially save you £2 in interest the first year.  Compounded over 25 years, about £65 in total.

Say you SalSac'd £100 net pay into your pension, that's equivalent to (at least) £147 gross into your pension.  I.e. Grossed up with 20% tax and 12% NI (100/(0.8-0.12)).  Say 6% average growth, after one year that would be £147 + 6% = £156ish.  Compounded over 25 years, that would be about £630, so a gain of £530 in total.

I'd go with the pension.