Salary sacrifice bringing taxable income into lower tax bracket

lucyandthomas

Hi 

Would really appreciate some guidance.

Salary is 82K, car benefit is 6927, fuel benefit is 2952, healthcare is 1669. Total £93,548

I want to pay as much as possible into my pension by salary sacrifice this tax year. I have 40K allowance for 2021/22, and 65K total to carry forward from 2018/19, 2019/20 and 2020/21, so total possible pension contribution for 2020/21 is 105K.

I know I can only salary sacrifice such that I'm still being paid the national minimum wage.

My question is, would I still get 40% tax relief on the sacrificed money as a higher rate tax payer, even if I sacrifice enough to bring my taxable income (plus benefits) below the higher rate tax threshold of 50K?

Thanks

MallyGirl

no - as you don't get tax relief as such, you just earn too little to pay the 40% tax. Don't forget that you will be avoiding 20% tax and 12% NI below £50k so it is still a good deal at 32% even if it is not as good as 42% above £50k

Dazed_and_C0nfused

You don't get any pension tax relief with salary sacrifice as you are agreeing to a reduced salary in return for your employer contributing more to your pension and employer contributions do not qualify for tax relief.

The tax (and NI) saving comes from you not having the income to be taxed in the first place.

If you sacrifice £10k you would avoid paying 40% tax on that £10k.  If you sacrificed £60k you would be avoiding paying a mix of 20% and 40% tax.

The standard higher rate threshold is no longer £50,000, from April 2021 it has increased to £50,270.

MX5huggy

Your total possible pension contribution this year is not £105k as you can’t contribute more than you earn, even when using previous year’s allowance. Is there any other pension contributions? 

You may not want to use the max this year so you have some left next year. 

lucyandthomas

Thanks all.

Paying in 105k this year was never a viable option, but thanks for the info.

I've got 30K left from 2018/19 to carry forward, so thinking I'll probably sacrifice £70K this year (otherwise I'll lose the chance to carry the 30K f from 2018/19 forward), and then the rest can be carried forward next year/year after.

So if total salary and benefits is 93.5K, and I salary sacrifice 70K, presumably I will avoid paying 40% tax on 43.5K, and avoid paying 20% tax on 26.5K. Is that right? 

Thanks

MallyGirl

here is where it gets tricky - at least from my understanding anyway. Please someone correct me if I am wrong.

You are limited to £40k (ee and er gross contributions) or earned income, whichever is lower. So if you sal sac down to £23.5k then that would be the limit on contributions? You need to find the sweet spot where you can use previous uears carry forward but not drop salary below what you want to contribute.

or I may have misunderstood? I had indeed misunderstood - I have left it in just in case I am not alone in that

kuratowski

It's as Dazed said, salary sacrifice is an employer contribution not an employee contribution.  So the relevant earnings limit doesn't apply to sal sac contributions, only AA + carry forward matters.

MallyGirl

kuratowski said:

It's as Dazed said, salary sacrifice is an employer contribution not an employee contribution.  So the relevant earnings limit doesn't apply to sal sac contributions, only AA + carry forward matters.

good to know. My desired contributions fall on the sweet spot I thought mattered so my misunderstanding hasn't affected me at all.

german_keeper

Blimey that's all a bit complicated. Glad I'm a relative pauper then I don't need to get involved in stuff like that.

lucyandthomas

@german_keeper - it really is horribly complicated. My brain is fried!

According to my employer, I can sacrifice as much as I like as long as my salary remains above £18,069.48.

That means I can sacrifice up to £75431, so my plan to sacrifice 70K should be fine. And by doing so, presumably I will avoid paying 40% tax on 43.5K, and avoid paying 20% tax on 26.5K. Is that right? 

Thanks for all the help

MallyGirl

and avoid paying 2% NI on 43.5K, and avoid paying 12% NI on 26.5K

sounds like a plan if they have said that. Mine has an arbitrary limit beyond which they move it to net pay (from sal sac) which I found out the hard way.