Salary Sacrifice and State Pension

singhini

I have a difference of opinion with a friend regarding salary sacrifice and state pension contributions.

Picture this:
Person earns £52,000 a year and tells his employer he wants to salary sacrifice £40,000 into his company pension leaving them £12,000 as take home pay (NB: £40,000 is the max annual pension savings).

£12,000 take home is less than the £12,570 Personal allowance so no Income Tax to pay but there is some NI tax to pay (£12,000 less £9,880 allowance = £2,120 which is about £280 annual NI tax paid).

Question 1: has this person achieved a qualifying year towards state pension ?   (since they have earnt more than 52 times the LEL and have paid NI contributions). The legislation states  "a qualifying year is one in which you have paid (or treated as having paid) contributions on earnings of at least 52 times the Lower Earnings Limit" so to me this means has the person earn't atleast £6,396 (i.e. £123 x 52) and have they paid any NI contributions and the answer is yes to both i.e. £52,000 and paid £280 tax


Question 2: from April 2023 the NI allowance increases to £12,570 and so this would mean should the person again repeat the above he would again pay no income tax but now have paid no NI tax, and so; are they entitled to claim NI Credits?   (they may not have paid NI tax this time but if they claim NI credits they would be "treated as having paid" which is what the legislation states).

molerat

1) Yes. £12K is £230 per week, well above the LEL of £123 per week to be credited with class 1 NI

2) The LEL is remaining the same (likely increased with inflation as usual from 2023), it is just the PT where you start to pay NI is increasing from £190 per week to £241 per week.

As they will likely be regularly paid the £6396 is not really relevant

That PT change is actually effective from July this year.

Dazed_and_C0nfused

are they entitled to claim NI Credits?

No, why would they when they have made the choice to give up some of their salary?

But being able to claim "NI credits" and getting a qualifying year for State Pension purposes are two different things.

Grumpy_chap

AIUI, the individual who does the SS in that way will still accrue state pension qualifying year.

Not many people can SS down to £12k because of need to comply with NMW

zagfles

They'd only get able to sal sac down to £12k if they're part time.

NI paid is irrelevant. If they earn above the LEL every pay period then it's a qualifying year. Plenty of people earn between the LEL and PT and so get qualifying years without paying any NI.

Grumpy_chap

Not many people earn £52k per year part time.

singhini

Thanks to everyone so far who has commented. Just to say the situation i proposed in my post is a hypothetical one   (i was debating a scenario with a friend in the pub on Friday where i said i felt there were too many tax breaks and that i think it might be possible to earn £52,000 and not pay any tax). 

Having read the comments and even when you take into consideration NMW (which i had not), i still feel it is possible to earn £52,000 and Salary Sacrifice £40,000 leaving you with a take home pay of £12,000 and pay no Income Tax and no NI Tax and still be awarded with a qualifying year for state pension and still comply with NMW requirements.  

Lets take each point one-at-a-time:

1) Has the person earnt 52 times the LEL ?  =  Yes   (they earnt £52,000 which is way above £123 x 52 weeks)   [therefore they will be awarded with a qualifying year for state pension].

2) Has the person earnt NMW of £9.50 per hour  =  Yes  (40 hrs per week x 52 weeks = 2,080 hrs / £52,000 = £25 per hour)  [being full time or part time is irrelevant] 

3) Has the person any taxable earnings ?  =  No   (SS £40k so leaving £12,000 which is less than the £12,570 allowance)   [so no Income Tax to pay]

4) Has the person any income above the NI allowance  = No  (£12,000 earnings left after £40k SS is less than the £9,880 incoming £12,570  NI allowance)    [therefore no NI tax to pay]

molerat

1) If they SS they have not earned £52K.  If the pay is erratic they may not satisfy the 52 x LEL as that only applies for periods of pay between the LEL and UEL.  You cannot simply use the 52 x LEL, a regular pay over 52 weeks at just above the LEL will give 52 weeks credits. A big pay packet irregularly could void that.

2) If they SS down to £12K they have not made minimum wage for 40 hrs.  £12K / 52 / 40 = £5.77.

SS means you are not paid that amount.

Albermarle

To reach the NMW, they need to earn 40 X £9.50 X 52 =  £19,760 pa , or  maybe a bit less if they are not working a 40 hour week ( nor sure how this works). That figure is after the salary sacrifice.

Also as their employers contributions contribute to the annual allowance, these have to be subtracted from the £40K.

singhini

Good point about "employers contributions" also need to be taken into account "within" the £40,000 salary sacrifice. 

Also that you need to be earning atleast the national minimum wage AFTER the salary sacrifice.

[Deleted User]

singhini said:

Good point about "employers contributions" also need to be taken into account "within" the £40,000 salary sacrifice. 

Also that you need to be earning atleast the national minimum wage AFTER the salary sacrifice.

Unless you are a director of the company.