Salary sacrifice and effect on annual pension contribution limit

lucyandthomas

Hi All

Tying myself in knots with this one so hopefully someone can help.......

Salary sacrificing down to NMW for several months this year, so taxable pay for 2021/22 will be reduced to around 20K.

Does that mean I can only put 20K into my pension this year, or can I still contribute the normal 40K plus 30K carry forward from 2018/19. Salary before salary sacrifice is just over 80K. Very much hoping I haven't misunderstood this, and can still contribute the 70K as planned.

Thanks in advance

MX5huggy

You can only put in what your earn, you are only earning £20k so that is the maximum. 

NedS

Total contributions from your employer and yourself can not exceed £40k (unless you have carry forward), so if your employer has contributed £20k through salary sacrifice, you can only contribute a further £20k, totaling £40k.

If you earn in excess of £40k (after sacrifice), and have unused allowances in the previous 3 years, you may be able to take advantage of carry forward. You would need to carefully check the HMRC guidance.

Dazed_and_C0nfused

You are only earning £20k so you can only contribute £20k.  

lucyandthomas

Ah - that's not good. Time to redo my sums. Thank you.

So if I change my salary sacrifice amount such that my taxable pay is over 40k this year, I should still be able to  contribute the 70K I planned as I can use carry forward. I just can't pay it all via salary sacrifice as this would bring my taxable pay down below the 40K threshold to use carry forward. Is that correct?

Salary is 84K. If I reduce my taxable pay to 42 K by salary sacrifice (EE plus ER contribution plus SMART payments), my sal sac pension contribution would also be 42k. Does this mean I can also pay 28K into my SIPP (or into my employers pension if they allow direct, non-salary sacrifice contributions), such that the total pension contribution is 70K (40K for this year and 30 K carried forward)?

MaxiRobriguez

You can't pay more than £40k in, so you can't even salary sacrifice a contribution of £42k.

If you have leftover money you want to invest then the next best wrapper is a S+S LISA which will give you the equivalent of 20% tax dodge. Not as good as your salary sacrifice, but better than a GIA or S+S ISA.

QrizB

I think you've been misled by some of the posters above.

• Your personal contributions, after tax relief, cannot exceed your earned income.
• The total of your personal and employer contributions cannot exceed £40k in the 2021-22 tax year unless carry forward is available.

Salary sacrifice is an employer contribution, not a personal one. so if your notional salary is £90k pa but you sacrifice £70k, your employer contribution is £70k but your personal contribution is zero.

There is also provision for carrying forward unused allowance from previous years, potentially allowing you to contribute over £40k this year. Whether you can salary sacrifice £70k will depend on what carry forward is available.

There's a calculator here that might help with that: https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

Apologies if I'm only adding to the confusion!

Edited for clarity and typos.

Dazed_and_C0nfused

I think this would be a worthwhile read for you.

Don't forget salary sacrifice means you aren't contributing anything, you are agreeing to a lower salary in return for your employer contributing to your pension.  That is why there is no pension tax relief with salary sacrifice, they are employer contributions

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/interaction-of-tax-relief-and-annual-allowance/

MX5huggy

You’re better with you first scenario SS £64k (Which you save tax and NI on) then £6k in to SIPP using up your £70k allowance because you have £30k carry forward. 

LISA can only be opened if under 40 and can take up to £4K per year till 50.  

jamesd

What you were already doing was correct.

Sacrifice from 80k down to 20k gets you to 60k of your total 70k target via salary sacrifice (counts as all employer contributions) and leaves you in addition the ability to contribute 20k more gross personally, if that was within the available annual allowance.

Since you have 30k of carry forward available its fine for the combination of employer (sacrifice) and personal contributions to total 70k and with 60k of sacrifice that means 10k of the 20k personal potential.

lucyandthomas

Wow - this is horribly complicated. Thank you for providing the links and the explanations - I think I'm starting to get my head round it.

I'll carry on with the original plan to sacrifice down to NMW for as many months as possible within my annual allowance of 40K plus 30k unused allowance, and then if there is any allowance yet, I can put up to this amount (which will be less than my earnings after sacrifice) into my SIPP. Is that correct?

Now I think I understand the rules about annual allowance, I realise that my self-employed OH will have some carry forward that can potentially be used too. I always believed that as her earnings were <40k, carry forward didn't apply, but I now realise that isn't entirely the case, and some annual allowance can be carried forward this year as she'll earn >50k. That calculation can wait for another day though!

Thanks again - much appreciated.