Salary sacrifice and annual allowance

lucyandthomas

Hi all

Please can I check my understanding of how pension contributions via salary sacrifice works.

Salary + car/health perks + savings interest = approx 95k

I have salary sacrificed down to national minimum wage for the majority of 2021/22 tax year, so approx 75k has reached my work pension. I have 65k in unused annual allowance from 18/19, 19/20 and 20/21.

I believe there is no limit on salary sacrificed contributions as they count as employer contributions.

I haven’t made any SIPP contributions this year, but could I do so (ignoring the fact that time is short)? Have I ‘used up’ 35k of carry forward allowance) with the salary sacrifice contributions? Or, could I still make SIPP contributions up to the salary I actually earned after sacrificing (ie my taxable income), and then this would come out of my 40k allowance for 21/22? Not enough headroom due to earnings, but if there was, could I contribute up to 105k gross (40k for 21/22 + 65k carry forward) into SIPP as well as salary sacrificing down to NMW?

My head is going round in circles! 

Many thanks

Apricota

Might you have my carry forward from the previous years, up to the past three? as you could fill these.

NoMore

lucyandthomas said:

I believe there is no limit on salary sacrificed contributions as they count as employer contributions.

They count against the Annual Allowance, as do all contributions to a pension from all sources. What they don't do is count against the Tax relief limit for you, but that's different from the AA.

zagfles

Yes your sal sac will use up £35k of carry forwards. Employer conts do count for the AA.

But what concerns me is how have you calculated that you have £65k in unused AA from previous years? If you didn't know that employer conts count for the AA then how have you worked out how much carry forwards you have? Even if using PIAs on pension statements you could surely see these included employer conts?

If you do actually have £65k carry fowards then you'll have £30k left, so you could pay into a SIPP the lower of £30k and your taxable earnings. (that's gross - 80% as the net cont)

Grumpy_chap

lucyandthomas said:

I have salary sacrificed down to national minimum wage for the majority of 2021/22 tax year, so approx 75k has reached my work pension. I have 65k in unused annual allowance from 18/19, 19/20 and 20/21.

I believe there is no limit on salary sacrificed contributions as they count as employer contributions.

You need to know which year those carry-forward allowances derive from, not just the total.

The £75k pension contributions this year will use the current tax year annual allowance (2021/22 £40k) first.
Then it will use remaining allowance from 18-19
Then 19-20
Then 20-21

If there is any remaining unused allowance from 18-19 at the end of this tax year, then that allowance will be lost to time. 
If the carry-forward from 18-19 was less than £35k, then that allowance is fully used now. 

Whatever other remaining carry-forward you have must be attached to 19-20 or 20-21 and therefore does not expire this week, so you have time to use that allowance up.

You are correct that employer contributions (SS) are not limited by your earnings, but the available tax relief is limited by the annual contributions allowance (including any carry-forward).  

If you make SIPP contributions, that will be capped at your earnings (NMW) for the year. 

You would not have £105k of contribution allowance available because £75k has been used through the SS employer contributions.

You can exceed the contribution allowance but it makes little sense from a tax point of view.  Also consider where you are against the lifetime allowance.

If you make additional contributions this year from your NMW salary, it may impact your future available allowance for SS employer contributions.  You have £105k this year, of which £75k is used, leaving max £30k to carry-forward (depending upon which previous years the carry-forward is attached to.  So, next year your maximum contribution allowance will be £30k + £40k = £70k.  If you plan to SS down to NMW again this (next) year (2022-23) , you will be consume all remaining carry-forward plus the current year contribution allowance.  From 2023-24 you will be restricted to the annual contribution allowance in terms of available tax relief.

zagfles

Yes good point, if you use up your all your carry forwards by paying into a SIPP this year then next year you'll be restricted to £40k PIA which might mean you won't even be able to sal sac enough to get out of the higher rate tax band.

lucyandthomas

Thanks for all the responses.

Carry forwards allowances are:
31k from 18/19
29k from 19/20
5k from 20/21

So, my 75k of salary sacrifice for 21/22 has used up all of my 18/19 allowance leaving 25 k from 19/20 and 5 k from 20/21.

I will want to use up the 19/20 allowance in 22/23, so planning to salary sacrifice 65k.

I will be able to pay 45k in 23/24, and 40k thereafter. Is that right?

It’s the potential SIPP payments that confuse me. If I earn 95k in 22/23, and salary sacrifice 65k, my earnings will be 30k. What could I potentially put into a SIPP? 

If salary stays at 95k, what could I pay into a SIPP in 23/24 (when I’ll have paid 45k by Sal sacrifice, using up 20/21 allowance) and 24/25 onwards (when I’ll have paid 40k salary sacrifice, no carryover allowance left)?

Couple of other things on my radar although not deal breakers:

Daughter goes to uni this year, so my taxable income affects her maintenance grant. Beneficial to keep my taxable income low. 

Child benefit threshold (have other children as well as uni student)

Many thanks in advance

Dazed_and_C0nfused

It’s the potential SIPP payments that confuse me. If I earn 95k in 22/23, and salary sacrifice 65k, my earnings will be 30k. What could I potentially put into a SIPP? 

What makes you think you can contribute anything?

Daughter goes to uni this year, so my taxable income affects her maintenance grant. Beneficial to keep my taxable income low. 

SIPP contributions don't reduce your taxable income

lucyandthomas

Dazed_and_C0nfused said:

It’s the potential SIPP payments that confuse me. If I earn 95k in 22/23, and salary sacrifice 65k, my earnings will be 30k. What could I potentially put into a SIPP? 

What makes you think you can contribute anything?

Daughter goes to uni this year, so my taxable income affects her maintenance grant. Beneficial to keep my taxable income low. 

SIPP contributions don't reduce your taxable income

Thanks - I know that sipp contributions don’t reduce taxable income.  I put that info in for context really - maybe I’ve confused things. Salary sacrifice has reduced my taxable income, which was the reason for using up large chunks of carry forward allowance this year and next.

Grumpy_chap

lucyandthomas said:

Carry forwards allowances are:
31k from 18/19
29k from 19/20
5k from 20/21

So, my 75k of salary sacrifice for 21/22 has used up all of my 18/19 allowance leaving 25 k from 19/20 and 5 k from 20/21.

Yes, the £75k SS employer contribution has used up all of 2021-22 annual allowance plus 2018-19 carry forward plus £5k from 2019-20 carry forward.

For 2022-23, you will have available:
£25k 2019-20 carry forward
£5k 2020-21 carry forward
£40k 2022-23 allowance (which is the first to be used)

lucyandthomas said:

I will want to use up the 19/20 allowance in 22/23, so planning to salary sacrifice 65k.

I will be able to pay 45k in 23/24, and 40k thereafter. Is that right?

Yes, and yes. 
Assuming no change to the rules for annual contribution allowance from 2023-24 onwards.

I do not understand your comments about paying into a SIPP in addition to SS employer contributions. 
The annual allowance and carry-forward can only be used once. 
SS employer contributions is the most tax-efficient way to use that allowance because it means you have saved NI as well as income tax on the contribution payments.

If you are using the annual allowance (plus carry-forward) in a planned way for SS employer contributions, then there is no remaining annual contribution allowance that can be used for tax efficiency through additional SIPP contributions.

I am not up to speed on salary threshold and impacts to student finance for offspring.  Though, if you earn £95k but SS £65k, that makes your salary equivalent £30k.  Is that low enough to avoid any detriment to the eligibility for student finance?
Certainly, well below the child benefit threshold (HICBIC).

As you go forwards, based on salary remaining at £95k (though I am sure you hope it will rise), and £40k annual allowance used for SS employer contributions, would mean a residual salary of £55k which will be just high enough to mean higher rate income tax and HICBIC.  You may just avoid those in 2023-24, but not from 2024-25 onwards.
Assume the £40k contribution allowance will not increase.

Another thing to check is the rules around SS and when you are permitted to vary the contribution levels.  This might be specific from scheme to scheme / employer to employer in how they apply the rules, but the general rule is that SS cannot be changed "at will" but there must be a life event, or some schemes allow once-per-year variation:
https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

lucyandthomas

Many thanks for taking the time to explain this.

Not sure where I got the idea that I could pay into my SIPP as well. Will ditch those thoughts and continue with SS payments. I’m fortunate that my employer is very flexible regarding changes to SS contribution levels.

Student maintenance loan threshold is a sliding scale - obviously, the lower the taxable income, the greater the loan. Maximum loan of about 9k is paid for taxable income of approx 25k or less. I think the ceiling is around 75k, at which point the student gets loan of approx 4.5 k

Thanks again