100 or 83% salary Sacrifice towards to pension?

everfor007

What is maximum salary sacrifice can be done towards to pension? Understood only 83% salary can be sacrifice toward to pension and rest 17% need to pay taxes because of national minimum wage, is it true?  still my pension will be under £40kPA.

biscan25

It's right you cannot salary sacrifice to the point you would earn below minimum wage. The exact percentage depends on how much you earn.
83% seems a lot though. This implies you earn somewhere in the region of £52 an hour, which doesn't quite tally with the total contribution being lower than 40k pa.
If you wanted to contribute more than this restricted amount, you can still contribute up to 100% of your earnings, either outside of salary sacrifice as an employee contribution if your scheme allows, or by paying into a personal pension.

Grumpy_chap

everfor007 said:

What is maximum salary sacrifice can be done towards to pension? Understood only 83% salary can be sacrifice toward to pension and rest 17% need to pay taxes because of national minimum wage, is it true?  still my pension will be under £40kPA.

The standard limit for pension contributions receiving tax relief is 100% of salary (which includes employer contributions) up to the £40k per year cap. 

Unused allowance from the previous 3-years (from the £40k) can be carried forwards so there is a theoretical maximum possible of £160k (£40k for each of previous three years plus £40k from current year).

Through salary sacrifice, the salary after sacrifice cannot fall below minimum wage.

everfor007

i am contractor through umbrella company, in my last month payslip for £10k  salary they deducted income tax, employment cost, NI, employees NIC and umbrella commission around 45% got cutoff due to D0 code.  so far i haven't contributed the pension for last few years, to save some money so i am planning full salary transfer to pension.

For example this month if i opted  salary sacrifice can i assume  will they transfer full £8300 i.e 83% paid to pension
 and rest 17%  i.e £1700  i need to pay taxes i.e deducted income tax, employment cost, NI, employees NIC .

 is my calculation assumption is right or wrong? pls advise.

Grumpy_chap

So, your umbrella rate (inside IR35) was £10k over the month of October.
4 weeks in October, so £2.5k per week, £500 per day.

The UC commission will be low, say £20 per week, equals £80 per month.  This is deducted first and not subject to tax / NI.

Then they'll deduct any valid expenses and these are paid to you with no tax / NI.  There is only very limited stuff that can be claimed when inside IR35.

Now comes the "backward" part as you need to start with the answer.  You want to be paid minimum wage.  For simplicity, use £10 per hour for 40 hours/week = £400.  £1,600 per month.
That is paid after deduction of employers NI, appx 14%, so £1,600 / 86% = £1,860 per month. 
So, £10k - £80 - £1,860 = £8,060k to your pension as employers contribution through salary sacrifice.

Then start from the top again and work forwards:
UC rate £10k
UC commission £80
Salary sacrifice pension £8,060
Deduct employer's NI from the £1,860 remaining = £260
Salary is then £1,600 which will be paid less employee NI (~£95) and income tax (~£110)
So you receive £1.4k per month

So, overall, from £10k, you received £8k pension plus £1.4k nett = £9.4k of benefit, though a great deal is delayed until retirement and may then be subject to taxation.

There are a lot of simplifications in the numbers above and approximations (I know min wage is not £10), but that gives the idea of how the system could work for you.  You can either calculate exactly yourself, or there may be on-line calculators to do this, or your UC should be able to run a projection very quickly.

This link gives more information (except the 5% first line will likely not apply because of recent rule changes)
https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment

Hope that helps.

EDIT:  Yes, your question "only 83% can be sacrificed towards pension" is about right, except of the remaining 17% you receive about 14% (of the gross UC £10k) so it is only about 3% going to deductions.  

Another consideration is how this might affect student loan repayments.  I suspect it is beneficial in that regard, but you'd have to ask another with better knowledge.

EDIT 2:  At a pension contribution rate of around £8k per month, you will obviously exceed the £40k annual cap (though you may have unused allowance from previous years available).  This does not align with the last sentence of your OP.

everfor007

Grumpy_chap said:

So, your umbrella rate (inside IR35) was £10k over the month of October.
4 weeks in October, so £2.5k per week, £500 per day.

The UC commission will be low, say £20 per week, equals £80 per month.  This is deducted first and not subject to tax / NI.

Then they'll deduct any valid expenses and these are paid to you with no tax / NI.  There is only very limited stuff that can be claimed when inside IR35.

Now comes the "backward" part as you need to start with the answer.  You want to be paid minimum wage.  For simplicity, use £10 per hour for 40 hours/week = £400.  £1,600 per month.
That is paid after deduction of employers NI, appx 14%, so £1,600 / 86% = £1,860 per month. 
So, £10k - £80 - £1,860 = £8,060k to your pension as employers contribution through salary sacrifice.

Then start from the top again and work forwards:
UC rate £10k
UC commission £80
Salary sacrifice pension £8,060
Deduct employer's NI from the £1,860 remaining = £260
Salary is then £1,600 which will be paid less employee NI (~£95) and income tax (~£110)
So you receive £1.4k per month

So, overall, from £10k, you received £8k pension plus £1.4k nett = £9.4k of benefit, though a great deal is delayed until retirement and may then be subject to taxation.

There are a lot of simplifications in the numbers above and approximations (I know min wage is not £10), but that gives the idea of how the system could work for you.  You can either calculate exactly yourself, or there may be on-line calculators to do this, or your UC should be able to run a projection very quickly.

This link gives more information (except the 5% first line will likely not apply because of recent rule changes)
https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment

Hope that helps.

EDIT:  Yes, your question "only 83% can be sacrificed towards pension" is about right, expect of the remaining 17% you receive about 14% (of the gross UC £10k) so it is only about 3% going to deductions.  

Another consideration is how this might affect student loan repayments.  I suspect it is beneficial in that regard, but you'd have to ask another with better knowledge.

Perfect.. Thank you so much for in-detailed elaboration. Yes, my role is inside ir35.

Grumpy_chap

Here is a simple explanation of the carry-forward rules:
https://www.hl.co.uk/pensions/contributions/carry-forward-rule

gozaimasu

I’m not familiar with these arrangements, but can’t you just ask the payroll people to do it for you? Surely they can work it out and arrange for a you to be paid minimum wage whilst contributing maximum into pension, that’s part of their job. Unless they’re just mindless drones who have to be told exactly what to do.

everfor007

gozaimasu said:

I’m not familiar with these arrangements, but can’t you just ask the payroll people to do it for you? Surely they can work it out and arrange for a you to be paid minimum wage whilst contributing maximum into pension, that’s part of their job. Unless they’re just mindless drones who have to be told exactly what to do.

i've spoken to them, they saying 17%  need to declare as per national minimum wage ..  Going forward my income will increase, even 17% will be too high..  i've done a google search on 17% national minimum wage  but  i haven't find any link talking about 17% is minimum wage need to declare under salary sacrifice.  Please let me know, if you come across any link of minimum wage details

Dazed_and_C0nfused

I think you are getting hung up on a figure (17%) that is irrelevant.

https://www.gov.uk/guidance/calculating-the-minimum-wage/calculating-the-minimum-wage

Grumpy_chap

everfor007 said:

i've spoken to them, they saying 17%  need to declare as per national minimum wage ..  Going forward my income will increase, even 17% will be too high..  i've done a google search on 17% national minimum wage  but  i haven't find any link talking about 17% is minimum wage need to declare under salary sacrifice.  Please let me know, if you come across any link of minimum wage details

I think the 17% is just how they phrased it.

You seemed to understand my explanation above. 
That explained how, on the current min wage and your current £10k per month, the pension contribution could be a bit over £8k, so (with accurate number by the UC rather than my approximations) 83% as pension leaves 17% for everything else.

Now, if your salary doubles to £20k/month:

• UC commission unchanged at £80 per month.  
• Min wage salary unchanged at around £1,600 per month.
  
• Same employers NI arises on the same salary £260 (£1,860 for salary plus employers NI)
• £20k - £80 - £1,860 = £18k to your pension as employers contribution through salary sacrifice
  

The percentage to pension is now 18 / 20 = 90%

If this does progress in this manner, then the statement that your pension will stay under £40k is going to become ever so less correct.

You also need to take some suitable advice about how things work if the annual contributions are exceeded as I don't know about that.  If you spend long contributing £18k per month to the pension, then LTA will also be a consideration.

Finally, there is an inbuilt error in how I calculated the employer's NI (I think) so it gives too high a number.  In the context of the overall subject that error is insignificant so I am not bothering to check or correct, but letting you know in the interest of completeness and accuracy.  It is possible to develop a spreadsheet to do these calculations in detail and / or maybe find a calculator, or simply take the accurate figures from the UC.

Ultimately, the percentage is not important so don't get hung up on that - it is purely a function of absolute figures deducted from the gross.