£60k maximum pension contribution allowance and salary sacrifice - what does it mean?

Itsme01x

I have been very fortunate to have had a promotion and my salary is now £86,504 per annum.  I am 58 this year and would like to maximise my defined contribution pension payments as much as possible before I am due to retire  - hopefully age 64.  (I spent a good few years on a low salary before things changed for the better)

I have calculated that I need approximately £3,130 per month (cash into bank each month) to live on and pay bills etc.  I have calculated that I can therefore salary sacrifice 43% of my salary (£37,196) while my organisation will also contribute (max) 14% (£12,110).  This therefore equates to a total of £49,306 per annum into my defined contribution pension.  The above does not take into account Single Person allowances and National Insurance contributions etc, which will mean that the amount, I believe, going into my pension pot is nearer £54,400 per annum.

However, I read somewhere that even though I am using salary sacrifice and not 'claiming back' the higher rate tax, I still need to take into account that the £60k limit includes the 40% tax relief and therefore the maximum, in reality, that I (or anyone else) is allowed to pay into my pension (including the employers contribution) is £36k per annum total.  Is that correct?

(I am aware that you can pay in over the limit, but the taxman will just come after you and you will pay the tax anyway) 

Some other information:
My mortgage is paid off
I have set aside an emergency cash fund
I do not have great credit card debt to pay off
My employer will not add any additional money from the savings that they make from reduced NI Contributions

Thank you in advance for any help and advice.



 

Marcon

Itsme01x said:

I have been very fortunate to have had a promotion and my salary is now £86,504 per annum.  I am 58 this year and would like to maximise my defined contribution pension payments as much as possible before I am due to retire  - hopefully age 64.  (I spent a good few years on a low salary before things changed for the better)

I have calculated that I need approximately £3,130 per month (cash into bank each month) to live on and pay bills etc.  I have calculated that I can therefore salary sacrifice 43% of my salary (£37,196) while my organisation will also contribute (max) 14% (£12,110).  This therefore equates to a total of £49,306 per annum into my defined contribution pension.  The above does not take into account Single Person allowances and National Insurance contributions etc, which will mean that the amount, I believe, going into my pension pot is nearer £54,400 per annum.

However, I read somewhere that even though I am using salary sacrifice and not 'claiming back' the higher rate tax, I still need to take into account that the £60k limit includes the 40% tax relief and therefore the maximum, in reality, that I (or anyone else) is allowed to pay into my pension (including the employers contribution) is £36k per annum total.  Is that correct?

(I am aware that you can pay in over the limit, but the taxman will just come after you and you will pay the tax anyway) 

Some other information:
My mortgage is paid off
I have set aside an emergency cash fund
I do not have great credit card debt to pay off
My employer will not add any additional money from the savings that they make from reduced NI Contributions

Thank you in advance for any help and advice.



 

Salary sacrifice means 'your' contribution is actually paid by the employer. Employer contributions are always paid gross, so there is no tax relief for the employee in respect of the contribution - BUT because you have never been paid the amount being contributed by the employer, you didn't pay tax on it in the first place, which is where your tax saving comes in (and at 40% if that's your marginal rate of tax). You might also see an NI saving because the money hasn't been paid to you.

Just be aware that you can't salary sacrifice to a point where your salary drops below minimum wage.

Itsme01x

Thank you for the fast response and I now see that with salary sacrifice, as you suggest, it means that it is the employer that is paying into the pension.  Does that mean though that, as in my example, the maximum contribution amount allowed to be paid in is £36k?

I appreciate no matter what, you cannot salary sacrifice below minimum wage level. 

QrizB

Itsme01x said:

Does that mean though that, as in my example, the maximum contribution amount allowed to be paid in is £36k?

No.

The employer contribution is paid gross, so the limit is £60k.

In your case this would be £12110 plus up to £47890 of salsac.

theblueflash

Itsme01x said:

Thank you for the fast response and I now see that with salary sacrifice, as you suggest, it means that it is the employer that is paying into the pension.  Does that mean though that, as in my example, the maximum contribution amount allowed to be paid in is £36k?

I appreciate no matter what, you cannot salary sacrifice below minimum wage level. 

I’m sure others will be along with the detail, however, in the case of salary sacrificed contribution, the total you can contribute against annual allowance  (you and your employer combined , though it will all show as employer) is £60K not £36k. 

Itsme01x

Thank you to to those who have responded to my original post.  It is really helpful.

Secret2ndAccount

And remember, the Annual Allowance has carry forward. If you didn't put in 40k last year, you can have the leftover amount this year. It goes back 3 yrs, so if you've put in 20,20,20 in the last 3 yrs, this years limit would be 120k!
Doesn't actually affect you as it looks like you can't afford to hit the 60k mark anyway.
By my calculations, you need 49,500 salary, so you can sacrifice 37k. Employer adds 12k for a total of 49k into pension.
49k goes into pension. Nothing gets added. Because you only earn 49.5k you don't pay any 40% tax.