30 y/o, Contractor, Planning for Retirement

Gary1984

What Umbrella form are you with? Are you able to move?

123imp

Gary1984 said:

If you're contracting through an Umbrella company then you won't be able to beat Salary Sacrifice into a SIPP.  As well income tax you'll save on employee NI of 12% AND employer's NI of 13.8%. so a hefty saving of about 40%, rising to over 50% if you become a higher rate tax-payer.

Talk to your umbrella and check pension contributions come off before all tax and NI calculated. I'm with Paystream and they definitely do this.

Hi,

This is really interesting, and throws a whole new thing to think about into the mix. If this was the case then I would want to be putting as much as possible into the pension, even before the LISA I assume?

Maybe if my Umbrella company don't offer this, I should give Paystream a call. Or do you think it's down to my individual contract?

MallyGirl

There are some limits on how much you can contribute and get tax relief on. You can contribute £40k per year but you must actually earn at least £40k. If you earn more you can carry forward unused allowance from previous years. Note that the £40k includes the tax relief so really you can put in £32k for the year and the tax man does the remainder.

123imp

Gary1984 said:

What Umbrella form are you with? Are you able to move?

Oh I'm definitely able to move, I'm with NASA at the moment. It looks like Paystream are also well reviewed. I do worry about changing things like this though, just because I'm hesitant of change when things are working - and I've never had any problems with NASA. Guess I should probably check what they actually offer first.

123imp

MallyGirl said:

There are some limits on how much you can contribute and get tax relief on. You can contribute £40k per year but you must actually earn at least £40k. If you earn more you can carry forward unused allowance from previous years. Note that the £40k includes the tax relief so really you can put in £32k for the year and the tax man does the remainder.

What would this mean as a contractor? As there's a difference between how much the Umbrella company receive, and how much I am actually paid after "employer" deductions have been made.

Pat38493

123imp said:

Pat38493 said:

123imp said:

Albermarle said:

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, no bonus, and at 57 I can withdraw with no tax within my personal allowance, and on top the first 25% is tax free as a lump sum.

To be clear salary sacrifice is only one method of making pension contributions from your salary. It is the best one as you make some NI savings as well. If you move jobs you may find they use a different method where for example the contributions come out of your taxed pay and the SIPP provider adds the tax relief.

Hopefully your LISA is a stocks and shares LISA, as over 30 years this should give better growth than a cash LISA.

Also due to your age the investments in your pension should be in the more risky/targeted for growth type investments.

Hi,

Thanks for this.

The LISA was actually cash, but I recently transferred it to a S&S LISA with AJ Bell after doing some research. I'm a complete novice, so I picked a few funds considered "risky" and thought I'd just leave it there.

Now you mention it, I actually have no idea if the SIPP pension would be salary sacrifice, or if it would be contributions from taxed pay as you mentioned. I think I'll need to phone my Umbrella company and ask them about this. If this were the case, would it just be the NI savings I would miss out on?

If you are receiving your income as a salary from your umbrella company and they have offered a salary sacrifice into your SIPP, this could be a good way to take it, but it's not clear from what you are saying that this is the situation.

What you said about it in your first post was basically correct, it's just that the term "salary sacrifice" has a very specific technical meaning where you are paid by an employer and take a salary reduction in return for your employer making pension contributions on your behalf.   This means you pay no tax or NI on that part of your income.  If it's an umbrella company I'm thinking this probably won't be your situation but I don't know much about them.

It the money will be paid into the SIPP from your net income, the end result is pretty much the same... HMRC / pension provider will add an additional 20% on to the amount you contribute to "give you back" the 20% tax you already paid (although actually even if you weren't paying any tax at all with income < £12570 this would still happen).

In the latter scenario, if you eventually become 40% taxpayer, you can claim an additional 20% back in your SA tax return from that portion of income that you paid 40% on but went to your pension (at least that's how I understand it but I'm sure someone will be along to correct me if not).

Hi,

I'm not sure as I have to speak to my Umbrella company, I'm going to assume that it is going to be payments from net income, based on what people have said. It's a shame its probably not salary sacrifice. 

So HMRC would give me 20% on anything I put in the SIPP? Then if I was to put in my entire salary, and live off my wife's income, they would basically give me £2-3k for free? That's very interesting. I would assume they know exactly what you earn and exactly what your owed in terms of tax back.

I am interested in the 40% tax scenario, as I could well end up their in future. So I would have to do a tax return submitted by January (for the previous financial year) to claim back the extra 20% from anything over 50k put into the SIPP?

Thanks.

Yes - you will get 20% added to what you put into the SIPP automatically.  There are 2 separate limits that applies to what you can put in during each tax year.
- £40K per year hard limit
- You can only put in up to the amount you actually earned from qualifying earnings (e.g. your work income), including any tax relief, so you generally can't put in your entire salary as you have to take into account the 20%, but you can certainly put most of it in.

Actually there are technically 3 limits because even if you are not earning a penny, you can still put a few grand in and get the 20% top up, but that's not relevant here.

Keep in mind the trade offs - once it's in there, you cannot get at it until you reach the age where it's accessible and for you that will be at least 57.

For 40% tax yes if the money is paid into the pension from net income, you would have to fill in a tax return at the end of the tax year to get the further 20% relief paid back to you.  (if you were on salary sacrifice or what Albermarle described, as an employee it's a lot easier because you just don't pay any tax at all on the amount you pay into the pension so it's all taken care of by PAYE).

DullGreyGuy

123imp said:

MallyGirl said:

There are some limits on how much you can contribute and get tax relief on. You can contribute £40k per year but you must actually earn at least £40k. If you earn more you can carry forward unused allowance from previous years. Note that the £40k includes the tax relief so really you can put in £32k for the year and the tax man does the remainder.

What would this mean as a contractor? As there's a difference between how much the Umbrella company receive, and how much I am actually paid after "employer" deductions have been made.

How much the umbrella receives is irrelevant as its not yours in this type of setup... its what people get mixed up with when they start asking why employers NI and Employer pension contributions etc are taken from their day rate. 

Gary1984

123imp said:

Gary1984 said:

What Umbrella form are you with? Are you able to move?

Oh I'm definitely able to move, I'm with NASA at the moment. It looks like Paystream are also well reviewed. I do worry about changing things like this though, just because I'm hesitant of change when things are working - and I've never had any problems with NASA. Guess I should probably check what they actually offer first.

That's understandable. In your situation though salary sacrifice where contributions are pre tax and NI is such a good deal it would be worth moving for. Talk to NASA first and see what they can accommodate. 

You may also find this forum useful:

https://forums.contractoruk.com/umbrella-companies/

If you do need to move another company that gets a very good write up is called Clarity which is generally the recommended option on the forum above.

Grumpy_chap

123imp said:

Whilst with the SIPP, it's salary sacrifice so I keep the 20% I would have paid in income tax, 

If the Umbrella Company allow the pension contributions to the SIPP under Salary Sacrifice (they often do), then you save the 20% tax, but you also save the respective employer's and employee's NI.

Albermarle

So HMRC would give me 20% on anything I put in the SIPP? Then if I was to put in my entire salary, and live off my wife's income, they would basically give me £2-3k for free? That's very interesting. I would assume they know exactly what you earn and exactly what your owed in terms of tax back.

Regarding paying pension contributions from your taxed pay, a couple of points for clarity.

1) Whatever you add to the pension, the provider will automatically add 25% ( not 20%). It is up to you to make sure you are eligible for the tax relief, the provider has no knowledge of your salary etc. So even if your salary was £20K , you could add £50K and 25% would be added. However down the line it would be picked up and you would have to unravel it all.

2) You can add your whole gross ( before tax ) salary to a SIPP, including the 25% tax relief. So say you earned £25K, you could add £20 K and £5K would be added in tax relief.

3) When you take the pension, 75% of it is potentially taxable, depending on your personal circumstances at the time, so the full benefit can be less than the tax relief initially added. This tends to improve a lot if you become a 40% taxpayer and get 40% tax relief.

4) Just be clear that the tax you pay on your salary is unaffected by pension tax relief. You pay the same amount of tax but you get the tax relief on the contributions paid into your pension.