Pension Contributions Using Salary Sacrifice

Chubba

Hi,

Been doing some research on making pension contributions via salary sacrifice.  I get how the contribution is calculated (or at least the theory) where the contributions will be higher under salary sacrifice but some sources say the effect on take home pay will be nil - i.e. effectively the same - but other sources are saying the net take home pay will be higher under salary sacrifice.

I must be missing something but what would make one statement true over the other?

Thanks

Getting_greyer

Less NI on sacrifice I beileve

af1963

Depends how much you choose to sacrifice compared to what you would otherwise be paying by other methods.

eg if I pay £1000 into my pension at the moment, I'd still pay NI on that amount ( and my employer does too) - usually 12% employee and 13.8% employer although rates for higher earners are different. So the NI on that £1000 costs me £120 from my take home pay.

Changing to SalSac saves this NI . If I leave the same amount going in to my pension, I will have £120 more take home pay.  If I prefer to put more in my pension, I can salary sacrifice £1120 ( so there is an extra £120 going into the pension) while keeping the same take home amount..   Or I can do anything in between.

Employers sometimes also pass on some or all of their NI savings, and that works the same way.

MX5huggy

What ball park salary are we taking about to the nearest £5k say. 

Those earning under £13k ish per year should not Salary Sacrifice because they pay no tax or NI anyway so miss out on the tax relief. Compared with someone on £60k with 4 kids and a student loan who will save a fortune on Salary Sacrifice. 

GazzaBloom

As a 40% tax rate payer I have calculated that for every £1,000 of take home pay, after deductions, that I sacrifice, approximately £2,000 goes into my pension by salary sacrifice (including the employers contribution and employees NI that they pay in as well)

Chubba

Thanks everyone for the comments.

MX5huggy said:

What ball park salary are we taking about to the nearest £5k say. 

Those earning under £13k ish per year should not Salary Sacrifice because they pay no tax or NI anyway so miss out on the tax relief. Compared with someone on £60k with 4 kids and a student loan who will save a fortune on Salary Sacrifice. 

Ball park c.£40k

af1963 said:

Depends how much you choose to sacrifice compared to what you would otherwise be paying by other methods.

eg if I pay £1000 into my pension at the moment, I'd still pay NI on that amount ( and my employer does too) - usually 12% employee and 13.8% employer although rates for higher earners are different. So the NI on that £1000 costs me £120 from my take home pay.

Changing to SalSac saves this NI . If I leave the same amount going in to my pension, I will have £120 more take home pay.  If I prefer to put more in my pension, I can salary sacrifice £1120 ( so there is an extra £120 going into the pension) while keeping the same take home amount..   Or I can do anything in between.

Employers sometimes also pass on some or all of their NI savings, and that works the same way.

and

GazzaBloom said:

As a 40% tax rate payer I have calculated that for every £1,000 of take home pay, after deductions, that I sacrifice, approximately £2,000 goes into my pension by salary sacrifice (including the employers contribution and employees NI that they pay in as well)

Back to my question about what determines whether your net take home pay stays the same or increases under salary sacrifice, it sounds like it's dependent on whether the NI saved is put into the pension or given back to the employee as extra take home pay?  Have I understood this correctly?

If that's the case then I presume it would then be down to the employer on how they administer the pension scheme/payroll?

Many thanks again

GazzaBloom

They way I work out how beneficial salary sacrifice is, is by calculating the income tax and national insurance I would pay on the different monthly salary amounts using the HMRC site:

Estimate your Income Tax for the current year - GOV.UK (www.gov.uk)

Run the calcs with varying amounts of salary sacrifice to see the different resulting take home pay you are left with.

I also have a home built spreadsheet calculator that shows how much a percentage figure of salary sacrifice pays into my pension including the employers contribution and NI.

The impact on take home pay is a result of the tax & NI you pay based on the reduced salary you get after the salary sacrifice based on your current tax code.

cloud_dog

No.  Your net cost (take home reduction) is less under SS.

Net Pay contribution (before tax):  £100 in pension, cost (net / reduced take home pay) £80

Salary Sacrifice contribution:  £100 in pension, cost (net / reduced take home pay) £68

NoMore

When they say take home will be higher under salary sacrifice, they are comparing it to the equivalent pension contribution done not by salary sacrifice, as SS saves you paying some NI which other methods don't. That's at the very base level, obviously if your employer then wants to also give you some of their NI saving its even better.

Its not simply that SS increases your take home, it doesn't work like that.

Albermarle

If that's the case then I presume it would then be down to the employer on how they administer the pension scheme/payroll?

Normally your contribution stays the same and you get higher take home pay ( as detailed above) . Of course you could request to increase your contribution a little, so the NI saving effectively ended up in your pension instead.