Salary Sacrifice & Pension contributions

Madrick

Salary sacrifice and paying into workplace pensions etc,
I'm a little confused and hope someone can explain the rules.
It says you can't pay more than you earn into pensions each year and a maximum of £40k

It also says (specifically with salary sacrifice) that you can't sacrifice to such an extent, that your remaining pay drops below the National Minimum wage (NMW)

So for example
Say the minimum wage is £17k pa
You earn a gross salary of £30k pa
your employer pays 5% into your pension
You opt for a 40% salary sacrifice

45% gets paid into your pension (40%+5%)
Your gross salary drops by 40% down to £18k pa (£1k above the minimum wage)

You can't salary sacrifice much more, as you would drop below NMW.

Can you now open up a seperate SIPP pension, and pay in a proportion of your £18k remaining salary, say £12k out of the £16k remaining, after the tax and NI have been deducted, with the tax being added back on to your investment by the pension provider?

Thanks

MX5huggy

Yes....... 

Madrick

MX5huggy said:

Yes....... 

👍.         . 

Dazed_and_C0nfused

Can you now open up a seperate SIPP pension, and pay in a proportion of your £18k remaining salary, say £12k out of the £16k remaining, after the tax and NI have been deducted, with the tax being added back on to your investment by the pension provider?

I'm not sure exactly what you mean by "the tax being added back" but there is no link between the tax you have paid and the basic rate tax relief due on a personal contribution to a SIPP or personal pension.

So in the scenario described you would have likely only paid c£1,085 in tax but if you contribute £12,000 the pension company will add £3,000 in basic rate tax relief making a gross contribution of £15,000.  Despite the fact you only paid c£1,085 in tax 

Madrick

Dazed_and_C0nfused said:

I'm not sure exactly what you mean by "the tax being added back" but there is no link between the tax you have paid and the basic rate tax relief due on a personal contribution to a SIPP or personal pension.

So in the scenario described you would have likely only paid c£1,085 in tax but if you contribute £12,000 the pension company will add £3,000 in basic rate tax relief making a gross contribution of £15,000.  Despite the fact you only paid c£1,085 in tax 

Thanks, yes that's exactly what I meant.
Just in the same way with the £2800 that you can invest once you become a nonearner under 75.
Cheers 👍

Albermarle

It is not necessary to open up a new SIPP, unless you particularly want to , you can just add extra to your workplace pension , just not by salary sacrifice .
Often workplace pensions have low charges ( not always ) as the employer has negotiated a discount.

Madrick

Albermarle said:

It is not necessary to open up a new SIPP, unless you particularly want to , you can just add extra to your workplace pension , just not by salary sacrifice .
Often workplace pensions have low charges ( not always ) as the employer has negotiated a discount.

Ahh thanks for that Albemarle
I was thinking of starting the SIPP to squirrel away the excess until I retire, which the plan is within the next 12 months... 
Then once retired continue to contribute to it £2800 pet annum until age 75 to obtain the tax benefits 
I know I could no doubt do this into my workplace pension wherever that ends up, but just thought it would be easier to have a separate little one, say with Evester for example

Thanks

bluenose1

More or less what I do. I have increased my works pension contributions so my salary is about £100  over NMW and pay my total net earnings  into a HL SIPP as easy to set up and no costs for keeping in cash.  Fortunately we have my husband’s income etc to live on. Intending to retire at the latest by 56 though if VR scheme will leave ASAP.  I will pay in £2880 per year after retirement then just leave a small amount in and do it again the following year.

The sim  is to withdraw the maximum you can tax free by making full use of personal allowance and 25% tax free cash.