Increasing salary sacrifice into pension to reduce property income liability

Jeremy535897

Presumably you would have to borrow to buy the property?

Jeremy535897

Presumably you would have to borrow to buy the property?

lisyloo

I’m not sure that’s the case.

are you saying your pension contributions are included in the £49k?
in which case they are not being paid by salary sacrifice.

if you are in a “relief at source”, scheme this means your pension is coming out of your NET pay after tax & NI and then basic rate tax relief added by the pension scheme.
if that is the case you can still do the BTL at basic rate but you’ll have to reclaim the higher rate tax from HMRC (for example by self-assessment).
the effect is the same, it’s just a bit more admin and having to wait for the money back.

you should also advise your employer that they can save 15% of pension contribution in employers NI if they used salary sacrifice.
this is a win-win as you’d save employees NI and they would save employers NI, so I’d definitely bring it up with them.

Hugocat

Yes I would have to borrow on a BTL mortgage to buy the property.
Lisyloo, Apologies, Im getting a bit confused. The 49k is what is on my P60, that is the gross for my years income, out of my gross income I paid into the defined contribution pension scheme as salary sacrifice and of course the employers paid in their contribution.
I have paid in to the pension scheme my percentage, which has then not been taxed or had NI taken, which is correct but the P60 still shows the gross 49k so I believe that is what will be taken into account on my tax return, making the income from the property into the 40% bracket.

As income from the property is classed as 'unearned' then I cant put that into pension and claim relief but I was hoping that I could increase my company scheme contributions instead though I'm not sure if this will help.

The employer is a fairly large established organisation with a few thousand employees, it used to have a Final salary scheme sadly before my time but is now DC pensions.
(A Defined Contribution (DC) Pension Scheme, also known as Money Purchase) -taken from the company handbook. 
which is salary sacrifice as I have just checked.

Thanks for the help, tax is such a messy subject.

Dazed_and_C0nfused

Hugocat said:

Yes I would have to borrow on a BTL mortgage to buy the property.
Lisyloo, Apologies, Im getting a bit confused. The 49k is what is on my P60, that is the gross for my years income, out of my gross income I paid into the defined contribution pension scheme as salary sacrifice and of course the employers paid in their contribution.
I have paid in to the pension scheme my percentage, which has then not been taxed or had NI taken, which is correct but the P60 still shows the gross 49k so I believe that is what will be taken into account on my tax return, making the income from the property into the 40% bracket.

As income from the property is classed as 'unearned' then I cant put that into pension and claim relief but I was hoping that I could increase my company scheme contributions instead though I'm not sure if this will help.

The employer is a fairly large established organisation with a few thousand employees, it used to have a Final salary scheme sadly before my time but is now DC pensions.
(A Defined Contribution (DC) Pension Scheme, also known as Money Purchase) -taken from the company handbook. 
which is salary sacrifice as I have just checked.

Thanks for the help, tax is such a messy subject.

You are getting very very confused.

If your P60 shows £49k then that is AFTER salary sacrifice i.e. you have a salary of say £55k and have given up £6k in return for your employer adding an extra £6k to your pension.

Salary sacrifice means YOU aren't contributing to the pension, that is why you don't receive the benefit of pension tax relief, the are employer contributions.

You making things massively more complicated than they need to be.  Rental income is not relevant earnings for pension contributions.  But even after the existing sacrifice you are earning £49k so those qualifying earnings allow you to pay into a pension (or increase your sacrifice) if you wish.

Are you aware that finance costs such as mortgage payments (including the loan interest) cannot be deducted as an expense when calculating the profits from a BTL property?

There may be a tax deduction you can claim for the loan interest but it is restricted and does not impact (reduce) what HMRC view your profit to be.

lisyloo

Hugocat said:

The 49k is what is on my P60, that is the gross for my years income, out of my gross income I paid into the defined contribution pension scheme as salary sacrifice 

Right, so if you asked your employer to salary sacrifice another £10K for example, then the gross on your P60 would be £39K.
Then you can have some rental profits and pay basic rate tax on them (up to the threshold).
Don't forget 3 months of the tax year has already passed for 2022/2023 so for this year you'd have to up the contributions for 9 months not 12.

Have you calculated what you think your rental profits would be?
Can you afford to do the salary sacrifice e.g. if for some reason you didn't get the rental profit, can you afford to live off the lower salary?
Pensions are very tax efficient but do remember you can't touch the money until at least 55/57 depending on your age.
It's important to understand that you cannot get the money out of the pension until that age (unless you die or are terminally ill).

Hugocat

Yes, I am very confused now.
My employers scheme says all over it 'Salary sacrifice', I do contribute into it and I can see the funds taken out on my payslips and when I log into my pension account I can see the funds going in there along with the employer contribution.
My P60 says 49k which is my annual gross.
so am I to take it that the scheme is not salary sacrifice? (although the organisation says it is) or my P60 is wrong?
I have done all the numbers regarding affordability and expenses, access to funds at 55 etc, I have done BTL before so am  familiar but was not in a position where It would put me into 40% bracket which is the Key issue.

Jeremy535897

You are correct in assuming that being a 40% taxpayer is not good for BTL. That is because you are taxed at 40% on the rental income less allowable expenses, but allowable expenses do not include finance costs. As an example, if your net rental income before finance costs was £5,000, and your mortgage interest was £4,000, you would receive a net amount of £1,000, but your tax bill would be £2,000 less a basic rate tax credit on the mortgage interest of £800, so £1,200, which exceeds the net rent.

To get round this ridiculous position (courtesy of Chancellor George Osborne), people whose spouses or civil partners pay tax at the basic rate tend to have the spouse or civil partner buy the property.

If you are in a salary sacrifice scheme, the P60 taxable pay figure is the figure net of the salary sacrifice.

Hugocat

Jeremy535897 said:

You are correct in assuming that being a 40% taxpayer is not good for BTL. That is because you are taxed at 40% on the rental income less allowable expenses, but allowable expenses do not include finance costs. As an example, if your net rental income before finance costs was £5,000, and your mortgage interest was £4,000, you would receive a net amount of £1,000, but your tax bill would be £2,000 less a basic rate tax credit on the mortgage interest of £800, so £1,200, which exceeds the net rent.

To get round this ridiculous position (courtesy of Chancellor George Osborne), people whose spouses or civil partners pay tax at the basic rate tend to have the spouse or civil partner buy the property.

If you are in a salary sacrifice scheme, the P60 taxable pay figure is the figure net of the salary sacrifice.

Indeed, that is why I was questioning whether me increasing my pension contributions to the amount of total income from BTL would help me avoid the 40% like it does with child benefit for example.

Jeremy535897

So long as you can do it (your employee allows it, you have sufficient relevant earnings and remain above minimum wage, and you are within your annual allowance), yes. Sacrificing salary in exchange for your employer paying pension contributions reduces your taxable income. So if you would have earned £50,000 but sacrifice £10,000, for tax purposes you now earn £40,000. If you then have net rental income of £5,000, before finance costs, you are not going to be paying higher rate tax.