Tax free childcare & Pension Salary Sacrifice

mac123

The Childcare service have refused my tax free childcare application as they think my taxable income will be over £100k

I told them that taxable income will be under £100k as I have increased my pension contributions for Jan, Feb & March so will be £90k 

They said as these pension contributions are via salary sacrifice then it’s not allowed so they refused my application 

I can appeal but before I do that, are they right? 

I didn’t want to tell her that my pension contributions have been via SS for years and it’s never been refused before 

thanks 

Dazed_and_C0nfused

I suspect you are overcomplicating things and, inadvertently, not telling them the truth.

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

That is why there is no pension tax relief with salary sacrifice as they are employer contributions.

mac123

Dazed_and_C0nfused said:

I suspect you are overcomplicating things and, inadvertently, not telling them the truth.

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

That is why there is no pension tax relief with salary sacrifice as they are employer contributions.

Ok thanks so with that in mind, does that mean I’m eligible or not?

mac123

For clarity, eligibility is based on adjusted net income being under £100k in that tax year

HMRC class net income as 

What adjusted net income is

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:

• trading losses
• donations made to charities through Gift Aid - take off the ‘grossed-up’ amount
• pension contributions paid gross (before tax relief)
• pension contributions where your pension provider has already given you tax relief at the basic rate - take off the ‘grossed-up’ amount

So if I’m not technically making ‘pension contributions’ then surely the bullet points don’t apply and it goes back to my taxable income figure which is visible to me on the HMRC app

mac123

Something else to mention … if I continue to get the same monthly taxable income for Jan, Feb & March it will take my taxable income over £100k

However, I’m significantly increasing the level of salary sacrifice for the next 3 months meaning it will be c£90k taxable income come end of the tax year

Jeremy535897

As has been said above, salary sacrifice means you agree with your employer that you will take a reduced salary, and in exchange your employer agrees to make contributions to your pension. This is different from making contributions yourself.

Say you have gross earnings, before any pension contributions, of £125,000. Your employer makes pension contributions for you of £12,000 and you make net pension contributions of £12,000. Your adjusted net earnings are £125,000 less £15,000 (£12,000 grossed up at basic rate) = £110,000.

If you choose to make a further pension contribution of £8,000 net (£10,000 gross), your adjusted net earnings fall to £100,000 (being £125,000 less original contribution grossed up £15,000 less new contribution grossed up £10,000). If instead of the new contribution you ask your employer to make a pension contribution on your behalf of £10,000, and in exchange your salary falls to £115,000, your adjusted net earnings still fall to £100,000 (£115,000 less your original grossed up contribution of £15,000).

Grumpy_chap

mac123 said:

The Childcare service have refused my tax free childcare application as they think my taxable income will be over £100k

mac123 said:

Something else to mention … if I continue to get the same monthly taxable income for Jan, Feb & March it will take my taxable income over £100k

However, I’m significantly increasing the level of salary sacrifice for the next 3 months meaning it will be c£90k taxable income come end of the tax year

I suspect whoever you were in communication with saw the average monthly income and projected that forward to make their decision.

That does not, therefore, take into account your lower salary for the final three months of the tax year.  It is irrelevant whether that lower salary is because of salsac pension or an irregular work pattern or whatever.  All that matters is that your ANI for the tax year will be lower than the £100k limit.

Can you write to the childcare service to simply state that your salary will be lower and you expect to be below the £100k cap so remain entitled to the tax free childcare?

I assume you are not impacted by pension contribution limits (though understand that would not directly impact the childcare provision in any case).

You should be able to manage(*) you income and pension contributions as you see fit through the year but it may be simpler next year to make salsac pension provision more steadily through the year so that the projection based upon extrapolation next year is a simpler view.  
(*) Managing salsac changes has to take into account the restrictions on frequency of amendments.

mac123

Jeremy535897 said:

As has been said above, salary sacrifice means you agree with your employer that you will take a reduced salary, and in exchange your employer agrees to make contributions to your pension. This is different from making contributions yourself.

Say you have gross earnings, before any pension contributions, of £125,000. Your employer makes pension contributions for you of £12,000 and you make net pension contributions of £12,000. Your adjusted net earnings are £125,000 less £15,000 (£12,000 grossed up at basic rate) = £110,000.

If you choose to make a further pension contribution of £8,000 net (£10,000 gross), your adjusted net earnings fall to £100,000 (being £125,000 less original contribution grossed up £15,000 less new contribution grossed up £10,000). If instead of the new contribution you ask your employer to make a pension contribution on your behalf of £10,000, and in exchange your salary falls to £115,000, your adjusted net earnings still fall to £100,000 (£115,000 less your original grossed up contribution of £15,000).

Thanks!

to make it easy … if my salary is £125k and I opt to sacrifice a % of my salary equal to £30k, would this mean my adjusted net income is under £100k?

mac123

Grumpy_chap said:

mac123 said:

The Childcare service have refused my tax free childcare application as they think my taxable income will be over £100k

mac123 said:

Something else to mention … if I continue to get the same monthly taxable income for Jan, Feb & March it will take my taxable income over £100k

However, I’m significantly increasing the level of salary sacrifice for the next 3 months meaning it will be c£90k taxable income come end of the tax year

I suspect whoever you were in communication with saw the average monthly income and projected that forward to make their decision.

That does not, therefore, take into account your lower salary for the final three months of the tax year.  It is irrelevant whether that lower salary is because of salsac pension or an irregular work pattern or whatever.  All that matters is that your ANI for the tax year will be lower than the £100k limit.

Can you write to the childcare service to simply state that your salary will be lower and you expect to be below the £100k cap so remain entitled to the tax free childcare?

I assume you are not impacted by pension contribution limits (though understand that would not directly impact the childcare provision in any case).

You should be able to manage(*) you income and pension contributions as you see fit through the year but it may be simpler next year to make salsac pension provision more steadily through the year so that the projection based upon extrapolation next year is a simpler view.  
(*) Managing salsac changes has to take into account the restrictions on frequency of amendments.

I think that’s exactly what’s happened here 

Thanks for taking the time to reply 

Dazed_and_C0nfused

mac123 said:

Jeremy535897 said:

As has been said above, salary sacrifice means you agree with your employer that you will take a reduced salary, and in exchange your employer agrees to make contributions to your pension. This is different from making contributions yourself.

Say you have gross earnings, before any pension contributions, of £125,000. Your employer makes pension contributions for you of £12,000 and you make net pension contributions of £12,000. Your adjusted net earnings are £125,000 less £15,000 (£12,000 grossed up at basic rate) = £110,000.

If you choose to make a further pension contribution of £8,000 net (£10,000 gross), your adjusted net earnings fall to £100,000 (being £125,000 less original contribution grossed up £15,000 less new contribution grossed up £10,000). If instead of the new contribution you ask your employer to make a pension contribution on your behalf of £10,000, and in exchange your salary falls to £115,000, your adjusted net earnings still fall to £100,000 (£115,000 less your original grossed up contribution of £15,000).

Thanks!

to make it easy … if my salary is £125k and I opt to sacrifice a % of my salary equal to £30k, would this mean my adjusted net income is under £100k?

It depend on what other taxable income you have (if any).

For example taxable pay of £95k plus interest of £500 and dividends of £2,000 would take your ANI to £97,500 even though the interest and dividends are all taxed at 0%.

Grumpy_chap

mac123 said:

to make it easy … if my salary is £125k and I opt to sacrifice a % of my salary equal to £30k, would this mean my adjusted net income is under £100k?

As DaC commented, that will depend on the details of any other income you have.  

Also, SS rules may not be as flexible as you seem to wish them to be.
You earn £125k and SS 24% £30k leaving salary at £95k.  Simple if administered on a flat basis through the whole year.
You appear to have already earned salary of 75% of £125k (9 of 12 months) = £93.75k.
Your remaining salary for the final three months is £31.25k
You cannot SS below NMW.  £9.50 for 40 hours per week for 13 weeks = £5k
That brings you to salary £98.75k (assuming that your employer's payroll can still process the change in time for January salary).
If you have any other income, interest, dividends etc., it is very likely you will breach the £100k.
If it is too late for your employer to process for the January payroll, you will have earned 10/12th of £125k = £104k before then receiving NMW for the final two months.

How flexible is your employer on opt in / out / change salary sacrifice?  There are restrictions on this, linked to lifestyle events and, sometimes, a once-per-year change to contract of employment (time-limited SS).  These are HMRC rules.

You may be worth engaging the services of an Accountant to give advice on the tax planning ahead of the end of the tax year.  If you cannot achieve the desired outcome via SS, you can still make pension contributions which will then be grossed-up and result in your ANI being below the £100k threshold.

I had another thought about the eligibility for the child care.   It is a thought only as I don't know the answer.
Is this actually assessed and determined in advance?
If you are subject to HICBIC, the common approach is to claim the child benefit and then repay via tax return once the final  ANI for the year is known.
Does the childcare not work similarly?