Salary sacrifice concern

RobHT

Malthusian said:

RobHT said:

So why I've been paying more to get the same state pension one day??

Yes. Same as you've been paying more to get the same NHS health benefits, police protection and fire brigade coverage.

National Insurance is a tax. For some people, paying more NI = more State Pension. You are not one of them. Due to your employment status and income, NI has nothing to do with your State Pension. It goes towards paying the State Pensions of people who have already retired.

I'm not one of them because I'm not on low income?
If that's correct, then the salary sacrifice is a no brain choice, but not only for me, also for whoever gains more than 35k (just looking quickly), as long as the employer pays what has been agreed.

Dazed_and_C0nfused

When it comes to pension contributions salary sacrifice is the best option for most people as it avoids paying tax and National Insurance.

You need to make sure you are earning enough post sacrifice to get qualifying years for NI purposes.  This isn't an issue for most people as NMW rules mean a full timer will always be earning well above the relevant NI threshold even after any sacrifice.

But for a few people they will miss out on pension tax relief.  As there is no pension tax relief with salary sacrifice (the pension contribution is an employer contribution) it sometimes makes more sense for low earners to make "relief at source" contributions instead.  

Exodi

RobHT - to put it bluntly, since you don't seem to be getting the message from other posters: you are very confused; your understanding of state pension, workplace pensions, salary sacrifice, tax, etc is all wrong. Please read up on this because most of what you have said is misguided and incorrect.

You need to forget about state pension - everyone gets it if they work for most of their life, it has virtually nothing to do how much you earn, the amount of tax you pay, or any salary sacrifice arrangements.

Salary sacrifice is simply a way to pay less tax.

Exodi

Just to try focus your mind on it, an example:

Typical workplace arrangement:

An employee gets paid £48,000 per year. Per month this means they earn £4,000 gross. They then pay income tax of approx £592 and NI of £385 = £3,023 net.

They opt to pay 5% employee contribution, which means they pay £160 from their net wages (so they've paid tax on this) into their pension pot and the pension provider claims 20% tax relief back from the government, bringing the total pension contribution to the 5% (£200). This means they receive £2,823 in their bank, and £200 in their pension pot. They paid £592 in income tax and £385 in NI.

Salary sacrifice

An employee gets paid £48,000 per year but decides to salary sacrifice 5% of it, so effectively gets paid £45,600. Per month this means they earn £3,800 gross. They then pay income tax of approx £551 and NI of £360 = £2,889 net.

The employer then pays the sacrified salary into the pension pot, which would be £200 in this example - there is no tax relief to claim as no tax has been paid on this. This means the employee will receive £2,889 in their bank and £200 in their pension pot. They paid £551 in income tax and £360 in NI.

Effectively they have gained an extra £66. Also, employers are required to pay 'Employer NI' on your earnings. If you reduce your salary by £200 per month (such as in this example), the employer would save £27.60 in employer NI... they may offer to give this to you also.

And to confirm, state pension is completely irrelevant to either scenario and would remain uneffected.

(I didn't want to get to complicated, but for the sake of completedness - technically in the first scenario, the employee could claim a tax refund for higher rate tax relief... if they did this or did a self assessment, then they would receive an extra £40 in this example.)

Malthusian

RobHT said:

I'm wondering how the state asks me for more but allowing a custom option to opt out such extra taxes that I won't see back otherwise.

It's called tax-efficiency. It's no different from using your ISA allowance or putting a property in the name of your lower-earning spouse or working via a limited company or claiming a tax deduction for your work uniform.

No man is obliged to order their affairs so that they pay more tax to the government. (Lords Sumner & Clyde et al)

I'm not one of them because I'm not on low income?

More complicated than that. If you want to know about the scenarios where more NI = more State Pension, you could Google "class 3 NI contributions" and "limited company salary lower earnings limit", but they are irrelevant to you, so I wouldn't bother until after your salary sacrifice arrangement is up and running.

If that's correct, then the salary sacrifice is a no brain choice, but not only for me, also for whoever gains more than 35k (just looking quickly), as long as the employer pays what has been agreed.

It is not entirely a no brainer because:

• it can in theory effect mortgage contributions (although as others have said lenders may take a sensible view)
  
• it does effect eligibility for income protection insurance
• it requires more admin for the employer than a bog-standard "net pay" workplace scheme and compliance with minimum wage law
  

But generally if it is available you should take it.

Salary sacrifice benefits pretty much everybody earning more than the £12,570pa "personal allowance". (Below the personal allowance it is better to pay contributions out of taxed income because you get 20% tax relief despite being in the 0% tax bracket. Minimum wage law is also more likely to bite.) However, due to the extra admin burden on employers, it is generally not offered to the "rank and file" in large companies.