Employer pension contributions query.

Bear777

Can someone please advise is there any savings/benefits/tax efficiency for my employer if they pay an annual bonus into my pension rather than an individual’s salary? 

I am about to go to war about my bonus and wondered if this is a way to sell it, as anything I get I’d more than likely be sticking into my pension anyhow. 

I have a DC, relief at source pension scheme with me contributing about 25% of my salary per annum and my employer 10%. 

Many thanks…

HappyHarry

There is a significant incentive for your employer to make pension contributions rather than pay salary - they save the 13.8% employer's National Insurance contributions. 

You would also save 12% or 2% in National Insurance contributions.

Many employers pay some or all of their saving into the employee's pension scheme, making it a win/win.

Bear777

HappyHarry said:

There is a significant incentive for your employer to make pension contributions rather than pay salary - they save the 13.8% employer's National Insurance contributions. 

You would also save 12% or 2% in National Insurance contributions.

Many employers pay some or all of their saving into the employee's pension scheme, making it a win/win.

I did think there was a saving/benefit to them doing that, just couldn’t remember, nor was google very helpful in identifying what the saving actually is. 

Thanks for that! 

Dazed_and_C0nfused

Don't forget you lose all of your pension tax relief with an employer contribution.

You will avoid paying tax and National Insurance on the bonus you give up but won't get the 25% normally added to relief at source contributions.

Marcon

Bear777 said:

Can someone please advise is there any savings/benefits/tax efficiency for my employer if they pay an annual bonus into my pension rather than an individual’s salary? 

I am about to go to war about my bonus and wondered if this is a way to sell it, as anything I get I’d more than likely be sticking into my pension anyhow. 

I have a DC, relief at source pension scheme with me contributing about 25% of my salary per annum and my employer 10%. 

Many thanks…

If you're paying 25% of your salary yourself (i.e. as a personal contribution) then why not suggest to your employer they operate salary sacrifice the whole time and not just on bonuses?

They get a corporation tax saving, you (effectively) get a tax saving (because you don't get paid whatever amount you salary sacrifice you don't get taxed on that amount) and both parties get an NI saving.

Bear777

Marcon said:

Bear777 said:

Can someone please advise is there any savings/benefits/tax efficiency for my employer if they pay an annual bonus into my pension rather than an individual’s salary? 

I am about to go to war about my bonus and wondered if this is a way to sell it, as anything I get I’d more than likely be sticking into my pension anyhow. 

I have a DC, relief at source pension scheme with me contributing about 25% of my salary per annum and my employer 10%. 

Many thanks…

If you're paying 25% of your salary yourself (i.e. as a personal contribution) then why not suggest to your employer they operate salary sacrifice the whole time and not just on bonuses?

They get a corporation tax saving, you (effectively) get a tax saving (because you don't get paid whatever amount you salary sacrifice you don't get taxed on that amount) and both parties get an NI saving.

Marcon thanks for this. 

I will probably look to increase my contributions over the next couple of years in order to continue to reduce my exposure to higher rate tax. I do this in order to obviously best prepare for retirement but it also helps me to maintain Child Benefit payments which my wife receives for our two kids. 

Looking into the future I am likely to see a modest annual increase in my salary and potentially a larger increase in taxable benefits which are currently v low for me as I am driving a full electric car. However, I expect the government to address the reduced BIK levels for EV’s and as such any increase in taxable benefits will increase my salary for tax. 

I currently use a salary sacrifice scheme for childcare vouchers (£243 a month sacrificed). I am likely to continue to need and use those vouchers for the next 5 yrs or so as our youngest goes through primary school and is likely to require some post school care. But again after that dries up my salary for tax will increase again and take me to levels well above the 40% tax threshold even though I am currently personally contributing £16.5 (gross) per annum into my pension. 

I am mindful of Dazed’s comments above. Being Relief at Source I pay £1100 per month which is made up to £1375 per month through pension tax relief. Surely that will be lost and is the calculation between the reduced tax and the NI savings not less than the tax reliefs at 25%?? 

An interesting debate as going forward I could be looking at having reduce my salary for tax by an additional £8-£10k to keep me below the 40% tax threshold and how best to do that is key. 

squirrelpie

Dazed_and_C0nfused said:

Don't forget you lose all of your pension tax relief with an employer contribution.
You will avoid paying tax and National Insurance on the bonus you give up but won't get the 25% normally added to relief at source contributions.

I'm confused. Doesn't the tax relief just pay you back the tax you have paid? An employer contribution is paid pre-tax so doesn't need the relief?

Linton

Apart from NI, generally you do not lose out by not getting tax relief if a bonus is paid as an employer contribution rather than as extra wages which you put into a pension.

If an employer pays out a  £10K pension contribution there is no effect on your income tax..

With RAS if your employer gives the £10K to you as wages you get taxed on it depending on your tax bands. If you then wish to contribute £10K to your pension you actually pay £8K, £2k is added to the payment by HMRC equivalent to the 20% extra tax you paid and you get any further 20% higher rate tax component back from HMRC as a cash payment. So you are in the same position as with an employer contribution.as far as income tax is concerned with £10K in your pension and no extra tax paid.

The main situation where it does make a difference is if your taxable income is less than your tax allowance.  In that case if your employer gives you £10K not all of it will suffer a 20% tax deduction.  However you still get the full 20% refund into your pension.

Dazed_and_C0nfused

squirrelpie said:

Dazed_and_C0nfused said:

Don't forget you lose all of your pension tax relief with an employer contribution.
You will avoid paying tax and National Insurance on the bonus you give up but won't get the 25% normally added to relief at source contributions.

I'm confused. Doesn't the tax relief just pay you back the tax you have paid? An employer contribution is paid pre-tax so doesn't need the relief?

It was just to make it clear that the method makes a difference to how things work.

The end result might be the same in most cases but they work in a totally different way.

And you don't need to have paid any tax to get basic rate relief under RAS 😃

Bear777

squirrelpie said:

Dazed_and_C0nfused said:

Don't forget you lose all of your pension tax relief with an employer contribution.
You will avoid paying tax and National Insurance on the bonus you give up but won't get the 25% normally added to relief at source contributions.

I'm confused. Doesn't the tax relief just pay you back the tax you have paid? An employer contribution is paid pre-tax so doesn't need the relief?

Me too now lol!!

Marcon

Bear777 said:

Marcon said:

Bear777 said:

Can someone please advise is there any savings/benefits/tax efficiency for my employer if they pay an annual bonus into my pension rather than an individual’s salary? 

I am about to go to war about my bonus and wondered if this is a way to sell it, as anything I get I’d more than likely be sticking into my pension anyhow. 

I have a DC, relief at source pension scheme with me contributing about 25% of my salary per annum and my employer 10%. 

Many thanks…

If you're paying 25% of your salary yourself (i.e. as a personal contribution) then why not suggest to your employer they operate salary sacrifice the whole time and not just on bonuses?

They get a corporation tax saving, you (effectively) get a tax saving (because you don't get paid whatever amount you salary sacrifice you don't get taxed on that amount) and both parties get an NI saving.

Marcon thanks for this. 

I will probably look to increase my contributions over the next couple of years in order to continue to reduce my exposure to higher rate tax. I do this in order to obviously best prepare for retirement but it also helps me to maintain Child Benefit payments which my wife receives for our two kids. 

Looking into the future I am likely to see a modest annual increase in my salary and potentially a larger increase in taxable benefits which are currently v low for me as I am driving a full electric car. However, I expect the government to address the reduced BIK levels for EV’s and as such any increase in taxable benefits will increase my salary for tax. 

I currently use a salary sacrifice scheme for childcare vouchers (£243 a month sacrificed). I am likely to continue to need and use those vouchers for the next 5 yrs or so as our youngest goes through primary school and is likely to require some post school care. But again after that dries up my salary for tax will increase again and take me to levels well above the 40% tax threshold even though I am currently personally contributing £16.5 (gross) per annum into my pension. 

I am mindful of Dazed’s comments above. Being Relief at Source I pay £1100 per month which is made up to £1375 per month through pension tax relief. Surely that will be lost and is the calculation between the reduced tax and the NI savings not less than the tax reliefs at 25%?? 

An interesting debate as going forward I could be looking at having reduce my salary for tax by an additional £8-£10k to keep me below the 40% tax threshold and how best to do that is key. 

If you want to contribute £1,375  to a RAS scheme, the amount deducted from your post-tax salary is £1,100. The pension provider then claims basic rate relief from HMRC and adds that to your pot, bringing you up to £1,375.

Alternatively, you can salary sacrifice £1,375 and the employer then pays over that amount (£1,375) to the pension provider:

• you don't pay tax on the £1,375 (because you've never received it as salary)
• both you and the employer pay lower NI (you because you're getting a lower salary, the employer because there's no NI on pension contributions)
• the employer gets corporation tax relief in the same way they would if they'd paid you £1,375 in salary, so there's no adverse tax consequence for them or you.

Salary sacrifice also has the merit of ensuring that higher rate tax payers get immediate full tax relief at their marginal rate, rather than having to claim any 'extra' relief from HMRC, either directly or through a self assessment tax return.