Salary sacrifice vs net pay method

Belludog

Hi it seems that the NMW increase has meant that i now fall under it given my pension contributions.
My company have written to me saying that I'm being moved from salary sacrifice to net pay method.
I contribute a high proportion of my salary so could reduce it to go back over NMW.

But can anyone explain the impact of moving from ss to net pay?

molerat

With net pay you will have NI deducted from the amount of the contributions, sal sac reduces both the tax and NI deducted as well as employers NI.

MX5huggy

Reduce it to get back over NMW. SS is better by 12%. 

You can then make personal pension contributions on the rest either to the work scheme if allowed or to a SIPP which will receive the tax relief. 

Dazed_and_C0nfused

Belludog said:

Hi it seems that the NMW increase has meant that i now fall under it given my pension contributions.
My company have written to me saying that I'm being moved from salary sacrifice to net pay method.
I contribute a high proportion of my salary so could reduce it to go back over NMW.

But can anyone explain the impact of moving from ss to net pay?

Salary sacrifice means you aren't contributing to a pension.  You are agreeing to a reduced salary in return fro your employer contributing to your pension.

The benefit is you avoid paying tax or NI on the amount sacrificed (assuming you are earning enough to be paying them in the first place).

Net pay means you are contributing to the pension but avoid paying tax on the amount contributed.  So if your monthly pay was £2,500 and you contributed 10% then your taxable pay would only be £2,250.

Your pay for NI purposes would remain £2,500.

MallyGirl

some employers are also extra generous and contribute the employer NI that they are saving by paying you less (not mine but OH's is)

Scot_39

Under net pay - the contribution cap is 100% of "relevant" earnings.

Under salary sacrifice you - as you state - are subject to a maximum hourly reduction to the national min wage - just gone to £10.42/hr

With salary sacrifice you have 2 salaries - essentially in simplest terms contractual salary - and that - sacrifice = pay roll figure - so anything sacrificed is paid in gross by employer in addition to their contribution - and you avoid both income tax and NI.

Under NET yYou may have to reclaim any higher or upper rate tax relief from HMRC - if scheme operates under relief at source - rather than NET - will pay NI at 12.8/2% marginal rates on the respective chunk of income as well.

If you really want to save the same amount - it might be best to say max out the sacrifice at new rates - and then pay any extra into a SIPP or third party personal pension plan - from remaining net income.

If the salary sacrifice brings you below upper rate c50k threshold - the tax relief applied by the SIPP/PP provider will compensate for the 20% income tax.

But unless a proper FA/IFA can suggest an alternative - you will inevitably be losing some NI relief.

Edit in light of D&CO corrections below - thanks again.

Dazed_and_C0nfused

Under NET you may have to reclaim any higher or upper rate tax relief from HMRC - and will pay NI at 12.8/2% marginal rates on the respective chunk of income as well.

No, under net pay you immediately receive the maximum possible tax benefit, there's never anything extra to claim from HMRC

Scot_39

NET pay was clearly the wrong term.

When I paid extra into my company scheme at the end of tax year - I had to reclaim the tax relief for the 40% tax paid.

AFAIK relief at source - is only ever the 20% rate (even curiously in Scotland for earnings in the 19% band). 

I had already paid the tax - the money came from my bank account - so from my net pay - provider only added the basic rate relief.

And I reclaimed extra via my self assessment returns.

Dazed_and_C0nfused

Scot_39 said:

NET pay was clearly the wrong term.

When I paid extra into my company scheme at the end of tax year - I had to reclaim the tax relief for the 40% tax paid.

AFAIK relief at source - is only ever the 20% rate (even curiously in Scotland for earnings in the 19% band)

I had already paid the tax - the money came from my bank account - so from my net pay - provider only added the basic rate relief.

That's relief at source (RAS).  The provider adds basic rate tax relief and any additional relief due has to be claimed from HMRC, either by a (provisional) tax code adjustment, end of year refund or including the contributions on your Self Assessment return.

Albermarle

Scot_39 said:

NET pay was clearly the wrong term.

When I paid extra into my company scheme at the end of tax year - I had to reclaim the tax relief for the 40% tax paid.

AFAIK relief at source - is only ever the 20% rate (even curiously in Scotland for earnings in the 19% band). 

I had already paid the tax - the money came from my bank account - so from my net pay - provider only added the basic rate relief.

And I reclaimed extra via my self assessment returns.

The term Net pay in this context is often confusing.

Many will think of net pay as after tax pay, but in terms on pension contributions net pay means it comes out before tax.