Salary sacrifice and annual allowance

Dazed_and_C0nfused

lucyandthomas said:

zagfles said:

lucyandthomas said:

No extra employer contributions apart from SS, so I think all is ok.

Are you sure about that? Employer contributions are now mandatory for all employers AIUI, why is your employer not contributing?

Money that goes into my SS pension is a combination of employee contribs, employer contribs and SMART. My employer doesn’t make any other contributions. Unless I misunderstood grumpy_chap’s question.

Salary sacrifice means you aren't contributing to the pension, you are agreeing to a lower salary in return for increased employer contributions.

That is why there is no tax relief added to your pension fund, employer contributions don't qualify.  So you sacrifice £100 and get £100 in your fund.  If you paid £100 yourself you would get £25 in pension tax relief added.

But you have avoided paying tax and NI on the amount sacrificed.

Salary sacrifice contributions tend to be thought of as the amount your employer contributes because of your sacrifice.

Whereas you are including your employer's normal contributions in with them?

lucyandthomas

zagfles said:

lucyandthomas said:

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

Note that student finance uses year -2 income, ie for starting in Sept this year it'll be 2020/21 income. But you can ask them to do a "current year income" assessment if income has dropped 15% or more, and this will then apply for 3 years, unless a further drop.

Other thing to check it what bursaries the uni is offering, these usually depend on income and vary by uni, sometimes on a sliding scale, sometimes cliff edge, a common threshold is £30k. Some can be very generous and are worth considering if you're close to the edge of a band/threshold anyway. And they're not repayable.

Yes, plan is to ask them to do a current year assessment, so her loan for academic year 22/23 will be based on earnings for 21/22.

I understood that the 21/22 figures would be used to calculate her loan for 2 years (academic years 22/23 and 23/24), and then 22/23 earnings would be used for academic year 24/25. But you say current year income (21/22) will apply for 3 years? Have I misunderstood?

Definitely need to look into bursaries too.

Thanks

Grumpy_chap

lucyandthomas said:

zagfles said:

lucyandthomas said:

No extra employer contributions apart from SS, so I think all is ok.

Are you sure about that? Employer contributions are now mandatory for all employers AIUI, why is your employer not contributing?

Money that goes into my SS pension is a combination of employee contribs, employer contribs and SMART. My employer doesn’t make any other contributions. Unless I misunderstood grumpy_chap’s question.

I am not sure it was directly my question, but a combination arising from Zagfles comments plus mine, but minimum pension must be 8% contribution, of which the employer must contribute minimum 3%.  

https://www.thepensionsregulator.gov.uk/en/employers/managing-a-scheme/contributions-and-funding

If you did not do SS (which makes all the pension contribution an employer contribution), on an income of £95k, the employer would also have to pay minimum 3% = £2,850 into your pension.

For professional job levels, the employer contribution is often higher than the minimum 3%.

So, if you are SS from £95k to £20k (SS = £75k), you should still get the employer's contribution on top as part of your overall reward package.  Otherwise, by facilitating SS, but not paying employer pension contributions on top, the employer is reducing your overall reward package and making an unfair saving (over and above the NI saving they - and you - already make).

That means your total employer pension contributions should be the 3% (£2,850) statutory minimum or higher contractual contribution PLUS the £75k SS contribution = total £77,850.

It was something I did not pick up, so thanks to Zagfles for being on the ball.

This means that your available contribution allowances and carry-forward may be lower if the (statutory / contractual) employer pension contribution has been ignored.  It is also possible that you already counted that, even without being aware, if the carry-forward was assessed from either an employer or pension fund statement of annual contributions.

lucyandthomas

Dazed_and_C0nfused said:

lucyandthomas said:

zagfles said:

lucyandthomas said:

No extra employer contributions apart from SS, so I think all is ok.

Are you sure about that? Employer contributions are now mandatory for all employers AIUI, why is your employer not contributing?

Money that goes into my SS pension is a combination of employee contribs, employer contribs and SMART. My employer doesn’t make any other contributions. Unless I misunderstood grumpy_chap’s question.

Salary sacrifice means you aren't contributing to the pension, you are agreeing to a lower salary in return for increased employer contributions.

That is why there is no tax relief added to your pension fund, employer contributions don't qualify.  So you sacrifice £100 and get £100 in your fund.  If you paid £100 yourself you would get £25 in pension tax relief added.

But you have avoided paying tax and NI on the amount sacrificed.

Salary sacrifice contributions tend to be thought of as the amount your employer contributes because of your sacrifice.

Whereas you are including your employer's normal contributions in with them?

OK - so the 75k that has gone into my pension this year (all SS) is all considered an employer contribution, and I have made zero contribution myself?

The employer contributions still count towards annual allowance (+ carry forward), so I can’t pay any more in to my work pension or a sipp myself as my annual allowance for this year and 18/19 has been used up (I know I’ve still got some carry forward from 19/20 and 20/21 but I don’t want to use that yet). Have I got it now? I really hope so 😀

Thanks for explaining

zagfles

lucyandthomas said:

zagfles said:

lucyandthomas said:

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

Note that student finance uses year -2 income, ie for starting in Sept this year it'll be 2020/21 income. But you can ask them to do a "current year income" assessment if income has dropped 15% or more, and this will then apply for 3 years, unless a further drop.

Other thing to check it what bursaries the uni is offering, these usually depend on income and vary by uni, sometimes on a sliding scale, sometimes cliff edge, a common threshold is £30k. Some can be very generous and are worth considering if you're close to the edge of a band/threshold anyway. And they're not repayable.

Yes, plan is to ask them to do a current year assessment, so her loan for academic year 22/23 will be based on earnings for 21/22.

I understood that the 21/22 figures would be used to calculate her loan for 2 years (academic years 22/23 and 23/24), and then 22/23 earnings would be used for academic year 24/25. But you say current year income (21/22) will apply for 3 years? Have I misunderstood?

Definitely need to look into bursaries too.

Thanks

"Current year" for 22/23 ac year would be 22/23 tax year. This would then apply for 22/23 and the next 2 ac years.

You have to apply for 22/23 ac year finance stating your 20/21 income as it's usually based on year -2. Then if you expect 22/23 income to be 85% or less, you can ask for a current year assessment. You guess 22/23 income. It's adjusted at the end of the tax year when you know your income. It must have fallen at least 15%. 

PS this applies to England, it might be different in other parts of the UK.

lucyandthomas

Grumpy_chap said:

lucyandthomas said:

zagfles said:

lucyandthomas said:

No extra employer contributions apart from SS, so I think all is ok.

Are you sure about that? Employer contributions are now mandatory for all employers AIUI, why is your employer not contributing?

Money that goes into my SS pension is a combination of employee contribs, employer contribs and SMART. My employer doesn’t make any other contributions. Unless I misunderstood grumpy_chap’s question.

I am not sure it was directly my question, but a combination arising from Zagfles comments plus mine, but minimum pension must be 8% contribution, of which the employer must contribute minimum 3%.  

https://www.thepensionsregulator.gov.uk/en/employers/managing-a-scheme/contributions-and-funding

If you did not do SS (which makes all the pension contribution an employer contribution), on an income of £95k, the employer would also have to pay minimum 3% = £2,850 into your pension.

For professional job levels, the employer contribution is often higher than the minimum 3%.

So, if you are SS from £95k to £30k (SS = £75k), you should still get the employer's contribution on top as part of your overall reward package.  Otherwise, by facilitating SS, but not paying employer pension contributions on top, the employer is reducing your overall reward package and making an unfair saving (over and above the NI saving they - and you - already make).

That means your total employer pension contributions should be the 3% (£2,850) statutory minimum or higher contractual contribution PLUS the £75k SS contribution = total £77,850.

It was something I did not pick up, so thanks to Zagfles for being on the ball.

This means that your available contribution allowances and carry-forward may be lower if the (statutory / contractual) employer pension contribution has been ignored.  It is also possible that you already counted that, even without being aware, if the carry-forward was assessed from either an employer or pension fund statement of annual contributions.

Wow - I thought my head was spinning at the beginning!

I think I’ve cause confusion by my lack of knowledge with the terminology, but I think everything I’ve done is ok. Please correct me if not.

The 75k that has been paid into my work pension for 21/22 is the total of 5k (ish) taken directly from my pre-tax salary each month (which I had incorrectly been calling the ‘employee contribution’, 6% of salary (which I had been calling the ‘employer contribution’) and SMART.

is that ok?

Grumpy_chap

lucyandthomas said:

The employer contributions still count towards annual allowance (+ carry forward)

Yes, that is correct.

lucyandthomas said:

OK - so the 75k that has gone into my pension this year (all SS) is all considered an employer contribution, and I have made zero contribution myself?

Yes and no.

From the point of view of your pension, it is all employer contribution and you made no contribution yourself.  
Employer contributions are not capped by 100% of earnings but are constrained for tax relief by the annual contribution allowances (plus ant carry-forward of unused annual contribution allowance).

BUT, your base-line is a salary of £95k PLUS 3% employer pension contribution (an extra £2,850). 
From the £95k, you would also have to pay 5% to your pension as employee contributions (unless the standard contractual employer contribution is higher than 8%).
You then requested a change to your contract to use salary sacrifice to reduce your salary to £20k and the remaining £75k to be used to increase your employer pension contributions.
So that means the employer contributions should be the £75k SS PLUS the original employer contribution £2,850 (or whatever the contractual percentage would be).

Hope that helps.

EDIT:  This post is now superseded as the OP has clarified that the base-line £95k includes the employer pension contribution.

Grumpy_chap

lucyandthomas said:

The 75k that has been paid into my work pension for 21/22 is the total of 5k (ish) taken directly from my pre-tax salary each month (which I had incorrectly been calling the ‘employee contribution’, 6% of salary (which I had been calling the ‘employer contribution’) and SMART.

Yes, if the £75k is everything paid in to the pension, that means the previous calculations of annual contribution allowances and carry-forward will be correct.

I think it was a bit of confusion (on my part at least) of understand your starting point of £95k salary of which £75k went to pension via SS (leaving £20k as salary).

I think it is actually:
£95k = salary including 6% employer pension, i.e. 106% salary
So, salary £90k plus 6% employer pension contribution £5k
Then, you SS £70k from the £90k to leave residual salary of £20k
The £70k plus the original £5k is now added together to £75k and all becomes employer pension contribution.
Because of the tax advantages (plus whatever was previously paid as employee pension), that total extra £70k of pension contribution is only costing you £60k (£5k per month deducted from your salary)

Hope that helps.

lucyandthomas

zagfles said:

lucyandthomas said:

zagfles said:

lucyandthomas said:

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

Note that student finance uses year -2 income, ie for starting in Sept this year it'll be 2020/21 income. But you can ask them to do a "current year income" assessment if income has dropped 15% or more, and this will then apply for 3 years, unless a further drop.

Other thing to check it what bursaries the uni is offering, these usually depend on income and vary by uni, sometimes on a sliding scale, sometimes cliff edge, a common threshold is £30k. Some can be very generous and are worth considering if you're close to the edge of a band/threshold anyway. And they're not repayable.

Yes, plan is to ask them to do a current year assessment, so her loan for academic year 22/23 will be based on earnings for 21/22.

I understood that the 21/22 figures would be used to calculate her loan for 2 years (academic years 22/23 and 23/24), and then 22/23 earnings would be used for academic year 24/25. But you say current year income (21/22) will apply for 3 years? Have I misunderstood?

Definitely need to look into bursaries too.

Thanks

"Current year" for 22/23 ac year would be 22/23 tax year. This would then apply for 22/23 and the next 2 ac years.

You have to apply for 22/23 ac year finance stating your 20/21 income as it's usually based on year -2. Then if you expect 22/23 income to be 85% or less, you can ask for a current year assessment. You guess 22/23 income. It's adjusted at the end of the tax year when you know your income. It must have fallen at least 15%. 

PS this applies to England, it might be different in other parts of the UK.

Ah, ok. I thought 21/22 would count as current year. 

22/23 income is likely to be more than 15% less than 20/21. But 21/22 income is likely to be less than 22/23.

If we ask them to use current year assessment, they will never use 21/22 income, which will be the least.

Might be better off using normal year rather than current year after all - she’ll only get the minimum loan in academic year 22/23, but will get more in the subsequent 2 years. 

Will have to do some sums! We are England btw.

Many thanks

lucyandthomas

Grumpy_chap said:

lucyandthomas said:

The 75k that has been paid into my work pension for 21/22 is the total of 5k (ish) taken directly from my pre-tax salary each month (which I had incorrectly been calling the ‘employee contribution’, 6% of salary (which I had been calling the ‘employer contribution’) and SMART.

Yes, if the £75k is everything paid in to the pension, that means the previous calculations of annual contribution allowances and carry-forward will be correct.

I think it was a bit of confusion (on my part at least) of understand your starting point of £95k salary of which £75k went to pension via SS (leaving £20k as salary).

I think it is actually:
£95k = salary including 6% employer pension, i.e. 106% salary
So, salary £90k plus 6% employer pension contribution £5k
Then, you SS £70k from the £90k to leave residual salary of £20k
The £70k plus the original £5k is now added together to £75k and all becomes employer pension contribution.
Because of the tax advantages (plus whatever was previously paid as employee pension), that total extra £70k of pension contribution is only costing you £60k (£5k per month deducted from your salary)

Hope that helps.

Thank you very much indeed - you’ve been really helpful