Change to Personal Tax Allowance

71peyman71

I did manage to speak to someone at HMRC and apparently they estimate tax on the gross earnings and do not take into account pension contributions through salary sacrifice. In fact she didn't even know what salary sacrifice was and seemed confused. I thought that tax is calculated after pension contributions but apparently not. 

I will need to speak to a tax lawyer.  

Jeremy535897

Salary sacrifice works as follows. The job pays £60,000. You ask the employer to reduce that to £50,000, but the employer agrees to pay £10,000 into a pension scheme for you instead (an employer contribution, scenario 1). This is instead of you receiving the £60,000 and paying £8,000 into your pension scheme yourself (an employee contribution which HMRC tops up to £10,000, scenario 2, but you pay an additional £2,000 tax compared to scenario 1).

In scenario 1, you pay tax and NI on £50,000, and the employer pays NI on £50,000. In scenario 2 you pay tax and NI on £60,000 (although your basic rate band is extended by £10,000), and your employer pays NI on £60,000. The "gross earnings " per HMRC in scenario 1 should be £50,000.

Dazed_and_C0nfused

71peyman71 said:

I did manage to speak to someone at HMRC and apparently they estimate tax on the gross earnings and do not take into account pension contributions through salary sacrifice. In fact she didn't even know what salary sacrifice was and seemed confused. I thought that tax is calculated after pension contributions but apparently not. 

I will need to speak to a tax lawyer.  

You really don't need a tax lawyer (whatever that actually is) or an accountant.

You just need to look at things logically on a tax year basis.

First thing is you never ever need to tell HMRC about salary sacrifice pension contributions as you are never entitled to any pension tax relief with salary sacrifice.

You aren't contributing to the pension, you are agreeing to a lower salary in return for additional employer contributions.

The tax (and NI) saving comes from not having the income to be taxed in the first place.

So unless you make some personal contributions and you are still a higher rate payer after the salary sacrifice your tax code shouldn't include any entry for pension contributions.

You will only get to the bottom of this by looking at the whole picture.  If you aren't willing/as to share that information then there really isn't much more we can add.

71peyman71

There isn't much more to say really. My basic salary is 70k which means I am a higher rate tax payer. My employer pays 10% into my pension provided that I sacrifice at least 5%. I believed that paying close to 40% will bring my taxable income down to  lower rate tax payer so that other benefits (car allowance, any bonus) are taxed at 20%. 

Clearly this is not the case as tax is calculated on the gross earnings.    

penners324

What are your company reporting to hmrc, this shows on your online tax account? Does it match you payslip?

It may well be you underpaid tax in the month you moved jobs. 

Dazed_and_C0nfused

71peyman71 said:

There isn't much more to say really. My basic salary is 70k which means I am a higher rate tax payer. My employer pays 10% into my pension provided that I sacrifice at least 5%. I believed that paying close to 40% will bring my taxable income down to  lower rate tax payer so that other benefits (car allowance, any bonus) are taxed at 20%. 

Clearly this is not the case as tax is calculated on the gross earnings.    

Don't know where you got that from but tax is based on taxable earnings, not gross earnings.

For example if you have a salary of £50k and pay 10% into a net pay pension or sacrifice 10% then your taxable pay, the bit HMRC are interest in, is £45k.  The £50k is irrelevant.

If you only pay into a pension using relief at source then your taxable pay would be £50k.

71peyman71

Dazed_and_C0nfused said:

71peyman71 said:

There isn't much more to say really. My basic salary is 70k which means I am a higher rate tax payer. My employer pays 10% into my pension provided that I sacrifice at least 5%. I believed that paying close to 40% will bring my taxable income down to  lower rate tax payer so that other benefits (car allowance, any bonus) are taxed at 20%. 

Clearly this is not the case as tax is calculated on the gross earnings.    

Don't know where you got that from but tax is based on taxable earnings, not gross earnings.

For example if you have a salary of £50k and pay 10% into a net pay pension or sacrifice 10% then your taxable pay, the bit HMRC are interest in, is £45k.  The £50k is irrelevant.

If you only pay into a pension using relief at source then your taxable pay would be £50k.

That's what I thought too but it seems that I am being taxed on my gross salary before any defined pension contributions are deducted. This is what I am suspecting from the HMRC letter that has estimated my salary to be astronomical!

p00hsticks

71peyman71 said:

There isn't much more to say really. My basic salary is 70k which means I am a higher rate tax payer. My employer pays 10% into my pension provided that I sacrifice at least 5%. I believed that paying close to 40% will bring my taxable income down to  lower rate tax payer so that other benefits (car allowance, any bonus) are taxed at 20%. 

Clearly this is not the case as tax is calculated on the gross earnings.    

I don't think you are using the word 'sacrifice' in its correct context here. If you are in a salary sacrifice scheme, then you don't contribute anything - as others have explained, you agree to accepting a lower salary in return for your employer paying n equivalent amount into a pension for you. 

If your employer is paying in 10% but your payslip is also showing a 5% pension deduction from your gross salary then that indicates your employer is not operating a salary sacrifice scheme - if they were, no pension contribution would show. 

Jeremy535897

I think that salary sacrifice is shown on payslips, as discussed here:
https://help.accounting.sage.com/en-gb/payroll/automatic-enrolment/salary-sacrifice-pensions.html

Bossworld

Jeremy535897 said:

I think that salary sacrifice is shown on payslips, as discussed here:
https://help.accounting.sage.com/en-gb/payroll/automatic-enrolment/salary-sacrifice-pensions.html

May depend on the payroll software being used as to how it's laid out on the payslip. Slightly off topic but SBC Payroll has improved since I worked there but IMO it's still not a patch on Sage 50 which has a fully fledged report designer.

The help centre article for SBC states:

In line with salary sacrifice guidance, the sacrificed amount shows as a negative payment on the payslip, rather than a deduction.

As all contributions are made by the employer, the total pension contributions show as employers pension on the payslip. No value shows for employee pension.

Equally, Sage 50's standard layouts, also show a negative pay element for the employee's contribution, and also shows a total 'Er pension' value. 

In the OP's example (as we understand it), this would show the 5% as a negative pay element, and the 15% total as the 'Er pension' value.

Either way, the taxable pay would reflect (pay - salary sacrificed portion) and that's what would ultimately come through on the P60, so the points made above about taking a lower salary are accurate, regardless of how the payslips show the workings out.