Salary sacrifice to workplace pension or contribute to SIPP

pauper79

Hello, I would be grateful for any advice.

I currently earn over £100k but I sacrifice into my workplace pension each year to hold my annual taxable income at £99,999 (ish!). I've always thought this was the right thing to do, to avoid paying effective marginal tax and NI of 62%.

Someone mentioned recently the better option is not to salary sacrifice but to stick it into a SIPP, then claim the tax relief, then put the tax relief in a LISA or ISA. I have tried very hard but I can't get my head around the maths of this.

I do understand this is a nice problem to have. But does anyone have any views on this?

Thanks

Dazed_and_C0nfused

I'm not convinced it is more beneficial.

With a personal contribution to a SIPP you get basic rate relief added to the pension fund.
You can claim additional relief through your Self Assessment return.  If sufficient higher rate tax has been paid this can be an additional 20% (by virtue of your basic rate band being increased by the gross SIPP contribution) and where it reduces your adjusted net income in the range £100k - £125k it can be a further 20% due to getting your Personal Allowance back.

But you don't get any relief against National Insurance.

With salary sacrifice you don't get any pension tax relief but the tax (and National Insurance) saving comes from not having the salary to be taxed in the first place.

Albermarle

I suppose the possible benefit is that with salary sacrifice, effectively all the tax relief  goes into the pension and is therefore taxable on the way out.
Whereas when you add directly to a SIPP , basic rate relief goes into the pension but any additional relief goes back to you, to do as you please with . 

Secret2ndAccount

Without question, using salary sacrifice is the most tax efficient way of contributing to your pension. What you are doing (sal sac down to 99,999) is the way to go.

I dug around in my brain for possible reasons why you might choose to go the less efficient route of paying into a SIPP. The total money you get out is going to be less than going the sal sac route, but here are some justifications:

1. You can access the SIPP in some way that you can't access your workplace pension. Maybe taking a lump sum without having to start drawdown. Maybe take some of the SIPP early. We would need to know more about the workplace pension to know if this is true.

2. You believe that the SIPP is more useful to your beneficiaries, should you die, than the additional benefits offered by extra contributions to your workplace pension.

3. You really need all of your salary but feel compelled to pay into a pension because of the tax benefits (they are very substantial at just above 100k). By paying into the SIPP you could get at some of the tax relief now, and spend it. Using sal sac, all the tax benefit goes into the pension. You choose to take one bird in the hand rather than two in the bush.

4. You dislike your company pension scheme. It only allows investment in a small number of poorly performing funds. The SIPP lets you choose investments which better fit your needs. Or you might have your eye on a piece of farmland. You could use the money in your SIPP to invest in that farmland, and not have to pay income tax on the annual profits, or captial gains tax when you sell it.

These are tactical reasons to choose a SIPP, not tax reasons. If tax is your concern, I refer you to line 1 of the answer.

jamesd

That someone might not understand salary sacrifice very well but see the last paragraph for some examples where sacrifice might not be best for some high earners - sometimes people can be in niche situations where not acting normally is best.

Assuming you concentrate the sacrifice into as few months as possible you'll:

1. save 40% income tax on the gross sacrifice amount
2. get employer contribution including any employer NI saving split added to the pension
3. have your NI cost reduced by 2% of the amount above the upper earnings limit, currently £4,167 a month
4.  have your NI cost reduced by 12% of the amount between the primary threshold, currently £792 a month, and the UEL, a £3,375 span
5. keep your personal allowance above 100k instead of losing some or all of it

Note  that NI is calculated independently for each pay period, not annually, so you can concentrate your sacrifice and get up to £3,375 saving 12% NI instead of the 2% you'd save if you did it evenly. Potentially £337.50 extra NI benefit a month though your total potential benefit will be constrained by the legal requirement to pay minimum wage and how much of each monthly sacrifice is above £4,167. 

The personal allowance and NI benefits aren't available if you only use a SIPP with personal contributions..

It's also worth knowing that ISA money counts for means tested benefits and legal rulings while pensions are protected until various near retirement circumstances. Because off these risks I consider the LISA to be too risky for retirement planning for many young and middle aged people and low earners, even more so for many women due to still common life and work patterns that increase their risk of benefit means tests.

It is possible to find situations where some non-sacrifice is useful. A person planning to retire before pension access age might value non-pension money more than pension money because it's available sooner. If their earnings are so high that they can't keep their personal allowance, can't concentrate sacrifice to save some 12% employee NI and don't get a cut f the employer NI saving their extra gain from sacrifice is just 2%. In such circumstances it'd be sensible not to use sacrifice to make the tax relief accessible before 55. Lifetime allowance issues can also make it more efficient sometimes.

Steve182

With your level pension contributions you should also consider whether there could be a potential future tax liability for exceeding LTA.

With the SIPP route you will reduce this liability as -

1. 20% tax rebate goes to your bank account to be reinvested in an ISA therefore sheltered from LTA
2. SIPP gives a great deal of flexibility, so you could take 25% TFLS at 55 (or as soon as your allowed) and reinvest that in ISAs to shelter the growth from LTA. Does your workplace pension offer that option?

As has also been mentioned earlier, the range of investment options for a SIPP are far greater than in a workplace pension so you have the flexibility to be more speculative with some of your pot, should you wish.

pauper79

Thank you all, this is very helpful advice. So much to think about! If I have understood all this correctly, then I can see how SIPP plus ISA might be the way to go if: 
- Workplace pension is unduly restrictive (Mine is a pretty standard defined contribution group personal pension. I can buy a few low cost tracker funds and that is fine for me)
- Wanting to do funky things with a SIPP like buy farmland
- Worried about LTA  
- You need to get at the cash sooner 
- The sort of combination of factors JamesD describes above
None of these apply to me, so I'll keep doing what I am doing. I was not previously aware of the savings possible through concentrating the sacrifice into as few months as possible. I will definitely try to do this. Presumably the best way is to sacrifice nothing in the first few months of the tax year so you build up a cash buffer, then have a few months at minimum wage, then balance it all out in Feb and March.