Salary sacrifice calculation

noclaf

Ive recently increased my employee pension contributions(via salary sacrifice) but there is room to contribute more; this would not gain me any additional employer contribution (maxxed out) but may help to reduce my tax liabilities...just need help with checking the numbers.

For April 2021-March 2022 my 'total taxable pay' will be at least £56,482.06. Im basing this amount on the total taxable pay for my last 3 months of payslips and the likely figures for the remainder of this tax year.

In order to minimise 40% income tax, should I salary sacrifice anything above £50k for total taxable pay (=£6,482.06) by dividing this by the no. of months remaining in current tax year? 

MX5huggy

Presuming you don’t live in Scotland. Yes. 

As it’s SS you save NI as well so that’s 2% more and on SS below £50k you save 12% NI so 32%. So maybe look at contributing more if you can afford it to build a bigger pension.

This presumes you don’t have any other income, bonuses, overtime, property or anything else. 

Do you have children? You’ll be able to claim child benefit and keep it if you do.

You also avoid pay Student Loan repayments. 

noclaf

MX5huggy said:

Presuming you don’t live in Scotland. Yes. 
Correct, I am based in England

As it’s SS you save NI as well so that’s 2% more and on SS below £50k you save 12% NI so 32%. So maybe look at contributing more if you can afford it to build a bigger pension.

My pension was rather neglected in the past so bumping up contributions for this year mainly but I doubt I can sustain the higher contributions next year (incoming sprog)

This presumes you don’t have any other income, bonuses, overtime, property or anything else. 
Potentially a bonus but it's generally so low it won't make much of a dent. Aside from that no property or income...just cash + poor interest, S&SISA & LISA

Do you have children? You’ll be able to claim child benefit and keep it if you do.
None at mo... one on the way

You also avoid pay Student Loan repayments. 
Interesting...I did not know this! I am still paying it 16 years after graduating. Why would my student loan payments stop out of interest? Not sure if it makes a difference but I have a 'Plan 1' student loan

Thanks for the replies, responses above.

MX5huggy

Student Loan payments don’t stop, you won’t pay them on the SS salary, it’s not a tax but the effect is the same.

So to simplify say you earn £60k and SS £10k.

The higher rate tax threshold is actually £50270 but let’s say it’s £50k.

If you don’t SS the £10k you will pay 40% tax 2% NI and 9% Student Loan total 51%. So take home would be £4900 or £10000 into pension. 

Once you have a child and presuming your partner does not earn over £50k as well it gets even worse or do I mean better. The tax charge on the Child Benefit means you miss out on a further £1,827.80 so the take home is only £3073! Or £10k into pension. Your sprog will thank you for saving in your pension so it doesn’t have to worry about you in your dotage, it won’t care if it has a second hand cot, push chair or clothes. 

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

zagfles

And if you really want you can take it a stage further and spread the extra sal sac over as few months as possible. That way you'll save some/most NI at 12% rather than 2%. NI works on a pay period basis rather than an annual basis.

You'll need to make sure you don't go below min wage (around £1550 a month) and contributing enough all months to get max employer conts.

noclaf

MX5huggy said:

Student Loan payments don’t stop, you won’t pay them on the SS salary, it’s not a tax but the effect is the same.

So to simplify say you earn £60k and SS £10k.

The higher rate tax threshold is actually £50270 but let’s say it’s £50k.

If you don’t SS the £10k you will pay 40% tax 2% NI and 9% Student Loan total 51%. So take home would be £4900 or £10000 into pension. 

Once you have a child and presuming your partner does not earn over £50k as well it gets even worse or do I mean better. The tax charge on the Child Benefit means you miss out on a further £1,827.80 so the take home is only £3073! Or £10k into pension. Your sprog will thank you for saving in your pension so it doesn’t have to worry about you in your dotage, it won’t care if it has a second hand cot, push chair or clothes. 

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

Thanks, really helpful explanation and seems a no brainer on upping the sal sacrifice esp as my pension needs a boost.

A couple of further qu's:

1. Let's assume I am on £60k per year, you mentioned the threshold of £50,270.00 for higher rate tax.
If I SS £9730 (60k-50,270) does that allow me to take full advantage of both reducing higher rate tax and stopping student loan payments? Or to put it another way what's the magic number I need to SS based on annual gross salary of £60k to take advantage of both the tax reduction and student loan avoidance/stoppage.

2. For the student loan that doesnt get paid I assume it then takes longer to pay off the remaining balance? Not necessarily a bad thing in the current low interest environment.

MX5huggy

There’s no magic number, there’s just thresholds when the percentage savings change. So the biggest saving comes in Sacrificing down to £50270 if you sacrificed to £52000 you’ll save the same percentage but the absolute saving would be smaller.

The Child benefit threshold is bang on £50000, and you’ve not said if the child will be born this tax year, and I’m not sure how the charge on this works for part years. 

The Plan 1 student loan payment threshold is £20100 this is where I try to sacrifice my salary down to because I save 20% tax 12% NI and 9% student loan. BTW my earnings are less than  £30k.

The final threshold is National Minimum Wage you can’t sacrifice below this the actual figure depends on how many contracted hours you work at what rate. As said around £18600 but this calculated monthly (if you are paid monthly) so is £1550 per month, if you were highly paid but did few hours it would be lower or badly paid (ie minimum wage) and did loads of hours it would be higher. You can sacrifice down to this in any month. 

I’m interested in @zagfles point for you, so if you’re sacrificing £10000 don’t do £834 a month for 12 months do £3334 for 3 months then you’ll save 12% NI instead of 2% on some if it (some one else do the maths).

Plan 1 interest rate is currently 1.1% so I really expect my pension where the SS is going to out perform this. If the worst happens (my death) the student loan is wiped but the pension is passed on (tax free). If I manage not to pay off the loan I shall be happy, I’m not clear if I will have to make loan repayments from pension income when the pension goes into payment, I want to take my pension before 65 when at least some Plan 1 is wiped for me I have some that may come under the 25 year rule. 

cloud_dog

noclaf said:

MX5huggy said:

Student Loan payments don’t stop, you won’t pay them on the SS salary, it’s not a tax but the effect is the same.

So to simplify say you earn £60k and SS £10k.

The higher rate tax threshold is actually £50270 but let’s say it’s £50k.

If you don’t SS the £10k you will pay 40% tax 2% NI and 9% Student Loan total 51%. So take home would be £4900 or £10000 into pension. 

Once you have a child and presuming your partner does not earn over £50k as well it gets even worse or do I mean better. The tax charge on the Child Benefit means you miss out on a further £1,827.80 so the take home is only £3073! Or £10k into pension. Your sprog will thank you for saving in your pension so it doesn’t have to worry about you in your dotage, it won’t care if it has a second hand cot, push chair or clothes. 

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

Thanks, really helpful explanation and seems a no brainer on upping the sal sacrifice esp as my pension needs a boost.

A couple of further qu's:

1. Let's assume I am on £60k per year, you mentioned the threshold of £50,270.00 for higher rate tax.
If I SS £9730 (60k-50,270) does that allow me to take full advantage of both reducing higher rate tax and stopping student loan payments? Or to put it another way what's the magic number I need to SS based on annual gross salary of £60k to take advantage of both the tax reduction and student loan avoidance/stoppage.

2. For the student loan that doesnt get paid I assume it then takes longer to pay off the remaining balance? Not necessarily a bad thing in the current low interest environment.

Just remember that you are already sacrificing some due to your standard pension contributions so, you calculations need to take this into consideration when calculating how much more to sacrifice.  The number you quote is the total, not the additional amount required.

You may already be on top of this but just thought I'd point it out  

noclaf

Thanks again.
I'm struggling with numbers as just realised my taxable pay was higher for April and May due to some deferred payments and a bonus that were made in those months.
So for April/May/June my total taxable pay was 16833.01
That leaves 33436.99 till we hit 50270.
When my Oct pay comes in I will go above 50270 based on total monthly taxable pay being 4405.45
To Zagfles point on maximising NI savings, how do I calculate the sal sac for each remaining month of this tax year? I guess I need to spread the 33436.99 over the next 8 months by zig zagging sal sac amounts for certain.months?
Just as FYI ,for this months pay I've sal sac 12% and with employers 12% contribution it's 24% net this month...that leaves me with 4405.45 being taxable.
*All things being well child due in this tax year.




 

noclaf

cloud_dog said:

noclaf said:

MX5huggy said:

Student Loan payments don’t stop, you won’t pay them on the SS salary, it’s not a tax but the effect is the same.

So to simplify say you earn £60k and SS £10k.

The higher rate tax threshold is actually £50270 but let’s say it’s £50k.

If you don’t SS the £10k you will pay 40% tax 2% NI and 9% Student Loan total 51%. So take home would be £4900 or £10000 into pension. 

Once you have a child and presuming your partner does not earn over £50k as well it gets even worse or do I mean better. The tax charge on the Child Benefit means you miss out on a further £1,827.80 so the take home is only £3073! Or £10k into pension. Your sprog will thank you for saving in your pension so it doesn’t have to worry about you in your dotage, it won’t care if it has a second hand cot, push chair or clothes. 

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

Thanks, really helpful explanation and seems a no brainer on upping the sal sacrifice esp as my pension needs a boost.

A couple of further qu's:

1. Let's assume I am on £60k per year, you mentioned the threshold of £50,270.00 for higher rate tax.
If I SS £9730 (60k-50,270) does that allow me to take full advantage of both reducing higher rate tax and stopping student loan payments? Or to put it another way what's the magic number I need to SS based on annual gross salary of £60k to take advantage of both the tax reduction and student loan avoidance/stoppage.

2. For the student loan that doesnt get paid I assume it then takes longer to pay off the remaining balance? Not necessarily a bad thing in the current low interest environment.

Just remember that you are already sacrificing some due to your standard pension contributions so, you calculations need to take this into consideration when calculating how much more to sacrifice.  The number you quote is the total, not the additional amount required.

You may already be on top of this but just thought I'd point it out  

Thanks for flagging, maths was never my forte...and evidently still isn't

zagfles

noclaf said:

Thanks again.
I'm struggling with numbers as just realised my taxable pay was higher for April and May due to some deferred payments and a bonus that were made in those months.
So for April/May/June my total taxable pay was 16833.01
That leaves 33436.99 till we hit 50270.
When my Oct pay comes in I will go above 50270 based on total monthly taxable pay being 4405.45
To Zagfles point on maximising NI savings, how do I calculate the sal sac for each remaining month of this tax year? I guess I need to spread the 33436.99 over the next 8 months by zig zagging sal sac amounts for certain.months?
Just as FYI ,for this months pay I've sal sac 12% and with employers 12% contribution it's 24% net this month...that leaves me with 4405.45 being taxable.
*All things being well child due in this tax year.




 

Basically NI is done on a monthly basis (assuming monthly pay). Whereas tax works on an annual basis. The NI rate drops from 12% to 2% for earnings above the UEL which is £4189 a month. For evenly spread pay this ties in the with the higher rate threshold £50270 a year, so the combined rates goes from 32% (20+12) to 42% (40+2).

However if you do "lumpy" sal sac such that your taxable income over the year is £50270 but some months is much greater than £4189 and others is much lower, then you only pay 2% NI on anything over £4189. Effectively you get 52% tax relief on some.

Your pay will vary massively as will tax, so you'll either need to understand how PAYE works or can budget OK with vastly varying pay, eg you could pay loads of 40% tax for a bit then negative tax.

You need to make sure you're getting min wage after sal sac each month, the company should ensure this as it's their responsibility. Also you need to check if they allow monthly changes, not all employers do. Plus make sure you pay in enough each month to get max company conts.

I don't know what effect it has on the student loan plan 1 as not familiar with that, eg what the threshold is, is it monthly, something to check, as you might not want to go below the monthly threshold if it's done on a monthly basis.

If you get any benefits (car, private health etc), they're probably subject to tax but not NI, so you need to account for that. 

Details of rates, min wage etc here:

https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2021-to-2022