Salary Sacrifice - how low can I go?

kimwp

I am making pension contributions through salary sacrifice and am wondering what value I can reduce my salary to in order to maximise pension contributions without negatively affecting anything else. I would be grateful for advice on if I have not accounted for anything and if I have the values correct:

- How much I need to live on
- Whether the salary sacrifice reduces any benefits from my company e.g. long term sickness pay by changing what is classed as my nominal pay
- Lower Earnings Limit £120 per week needs to be exceeded to get the benefits of paying NI
- Whether the NI contributions will be sufficient to add qualifying years to my state pension record (£183 weekly pay provides this) - confused as to how this interacts with the statement above, though it’s probably a moot point given the point below:
- Salary sacrifice can’t reduce wage below the National Minimum Wage ((£17142 annually = £1428 monthly for an older than 23yo on 37 hour weeks)
- Can’t exceed annual pension contributions allowance (£40k) or salary, whichever is lower

Many thanks!

robatwork

Although it sounds unlikely, if you are considering taking out a mortgage (or remortgaging) a bank would want to see your payslip and net salary from bank statements.

kimwp

robatwork said:

Although it sounds unlikely, if you are considering taking out a mortgage (or remortgaging) a bank would want to see your payslip and net salary from bank statements.

Thanks @robatwork, happily mortgage is paid off, but a good point to add to the list!

MaxiRobriguez

Your pension contributions should be amendable on a monthly basis nowadays so that's less of a factor as you can simply reduce the sacrifice for a number of months prior to mortgage application and re-start it after.

The other thing to consider is the LTA post retirement, if you're talking about meeting or getting close to annual pension contribution limits. You could find yourself sacrificing more than you need into your pension and getting stung by the LTA later in life. Impacts basic rate tax-payers (in employment) more than HRT's, but still even if you don't sacrifice to a point you become a basic rate tax payer, the money your sacrificing may be better in ISA's to allow greater flexibility, considering the tax advantage is lost.

Marcon

kimwp said:

I am making pension contributions through salary sacrifice and am wondering what value I can reduce my salary to in order to maximise pension contributions without negatively affecting anything else. I would be grateful for advice on if I have not accounted for anything and if I have the values correct:

- How much I need to live on
- Whether the salary sacrifice reduces any benefits from my company e.g. long term sickness pay by changing what is classed as my nominal pay

That's one your company will need to answer - ditto whether any life cover is based on pre or post sacrifice salary.

Remember too that if you are dismissed for any reason (including redundancy), any pay in lieu of notice and/or redundancy pay could be impacted by salary sacrice.

kimwp

Thanks @MaxiRobriguez! I don't think I'll get anywhere near the LTA, but good to consider!

af1963

You can't go below minimum wage using salary sacrifice, but if you want to and can afford to, you can make extra contributions separately - e.g. to a SIPP.  These can cover anything up to the full amount of your post-sacrifice salary, as long as you stay within the £40K annual limit( including any other employer contributions ) , or have unused allowances to carry forward .

You get tax relief added, even on contributions coming from the part of your salary that is below the tax threshold.

For example, if your salary was 36000 and you sacrificed 50% into your work-provided pension, so your post sacrifice salary was 18000. You could then pay in 14400 to a SIPP, which would be grossed up to 18000 by the SIPP provider, leaving 3600 outside the pension.  You would pay tax and NI on the post sacrifice salary, in this case around 2000.  But you can still end up with more than your gross salary, in your hand or in your pension.  (You'll probably also pay some tax later when taking the pension.)

kimwp

af1963 said:

You can't go below minimum wage using salary sacrifice, but if you want to and can afford to, you can make extra contributions separately - e.g. to a SIPP.  These can cover anything up to the full amount of your post-sacrifice salary, as long as you stay within the £40K annual limit( including any other employer contributions ) , or have unused allowances to carry forward .

You get tax relief added, even on contributions coming from the part of your salary that is below the tax threshold.

For example, if your salary was 36000 and you sacrificed 50% into your work-provided pension, so your post sacrifice salary was 18000. You could then pay in 14400 to a SIPP, which would be grossed up to 18000 by the SIPP provider, leaving 3600 outside the pension.  You would pay tax and NI on the post sacrifice salary, in this case around 2000.  But you can still end up with more than your gross salary, in your hand or in your pension.  (You'll probably also pay some tax later when taking the pension.)

Thanks @af1963!  I hadn't twigged that tax relief is added even when you haven't paid tax, I thought you could only get back what you had paid. 

Which raises an interesting point- I'd applied my above logic to the non-verbatim) phrase I've seen that "tax relief is at the highest tax bracket you pay". Does this mean 40% tax payers get 40% tax relief on SIPP contributions, even if they didn't pay 40% tax on the amount they are paying into the SIPP?

If so,  pondering that given that I am (just into being a) a 40% tax payer, would that mean I'd actually be better off paying into a SIPP and claiming 40% tax relief rather than getting the salary sacrifice NI and tax relief? Not sure if this is complicated by my employer matched contribution taking me just below the 40% threshold...

Dazed_and_C0nfused

No, you are mixing two things up.

Personal tax relief is limited to the tax you have paid so if you are paying higher rate tax on say £100 and contribute £5,000 (gross) to a relief at source scheme such as a SIPP or personal pension then you can only personally save paying 40% on £100.

But with relief at source schemes the pension company, courtesy of HMRC, always add the basic rate relief to eligible contributions so for example someone earning £10,000 and paying no income tax could pay £8,000 and get £2,000 basic rate relief added giving them a gross contribution of £10,000 despite not actually paying any tax.

kimwp

Dazed_and_C0nfused said:

No, you are mixing two things up.

Personal tax relief is limited to the tax you have paid so if you are paying higher rate tax on say £100 and contribute £5,000 (gross) to a relief at source scheme such as a SIPP or personal pension then you can only personally save paying 40% on £100.

But with relief at source schemes the pension company, courtesy of HMRC, always add the basic rate relief to eligible contributions so for example someone earning £10,000 and paying no income tax could pay £8,000 and get £2,000 basic rate relief added giving them a gross contribution of £10,000 despite not actually paying any tax.

Good stuff, then my original understanding (that salary sacrifice was the right thing for me) was right, very happy that I haven't inadvertently been missing out

And also to know about relief at source for income below the NMW

jamesd

Salary sacrifice is best since you can't get into te range where you're not saving NI or income tax due to the requirement not to go below minimum wage (part time workers could, though, and would get no income tax relief from sacrifice if the pay in the specific job was too low).

With salary sacrifice you get the pension contributions deducted before tax and if you have no other income that takes care of getting you all tax relief you're entitled to.

With relief at source, your basic rate band is increased by the gross value of that pension contribution, which gives you any higher or top rate relief you're entitled to by reducing the amount subject to higher rate tax. Usually salary sacrifice will take your after sacrifice pay below the higher rate band anyway but for a lot of people on high incomes this isn't the case and this bit does make a difference.

You are allowed to get more tax relief than you pay in tax in the year of contribution. This is most likely if you use savings to make relief at source contributions. Say you do 12k of gross relief at source contributions in conjunction with 40k of sacrifice that takes you to the top of the income tax personal allowance in gross pay. Tax due in the year is nil but you still get 20% of the 12k as relief at source tax gain. This assumes that you have some unused annual allowance from the last three years to allow you to go over 40k. Other than the personal allowance range it's not usually possible to get more relief than tax otherwise payable, just because of how the numbers work out, not because of any prohibition on it.

This is different to say venture capital trusts where the tax bill is worked out first then reduced by up to 30% of the amount bought, capped at no more than the otherwise payable tax - can't go below 0 due.

If you have significant higher rate income it's best to concentrate the sacrifice into as few months as possible at minimum wage. This takes more of each monthly NI charge into the basic rate range where it's saving you 12% instead of 2%. Unlike income tax, NI is calculated for each pay period individually, hence the benefit of doing this.