Employer pension contributions query.

Bear777

Marcon said:

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.

Thanks for this Marcon.

I worked up the figures this eve and it would actually mean that if I Sal Sac £16.5k and get my employer to pay this into my pension I would be close to £700 a year better off. I would also as you mention not have any of the hassle and delay to getting the extra relief back. 

My employer would save nearly £2.3k…

Seems a bit of a no brainer for me and my employer! It is also much easier to manage and monitor to ensure I stay below the higher tax rate. 

Shame I hadn’t thought of this before now and am trying to get my head round why I hadn’t thought of it previously. 

eastcorkram

If salary sacrifice is a good thing, for the employer , why don't more of them do it?

Where I am , (approx 600 employees), the scheme I'm in is salary sacrifice. I started there 12 years ago, and joined the scheme shortly afterwards. Most of my colleagues were not in the scheme. When auto enrollment came in, the scheme I'm in was closed, as in no one else could join, but it stayed the same for those already in it. 

Everyone else was put into the new one, which is definitely not salary sacrifice. Seems to me, the employer would save a lot of NI by putting everyone into the same scheme as me. 

Marcon

eastcorkram said:

If salary sacrifice is a good thing, for the employer , why don't more of them do it?

Often because they simply didn't know they could, or they think it's too much hassle to explain to a bemused and suspicious workforce (look at the number of posts on this forum anxiously enquiring what the employer's up to...).

eastcorkram said:

Where I am , (approx 600 employees), the scheme I'm in is salary sacrifice. I started there 12 years ago, and joined the scheme shortly afterwards. Most of my colleagues were not in the scheme. When auto enrollment came in, the scheme I'm in was closed, as in no one else could join, but it stayed the same for those already in it. 

Everyone else was put into the new one, which is definitely not salary sacrifice. Seems to me, the employer would save a lot of NI by putting everyone into the same scheme as me. 

The employer could save a lot of NI by offering salary sacrifice in the new scheme. Ask them why they don't - especially in the light of the first question asked in your post. 

eastcorkram

@Marcon

I'm asking them nothing 😄 it's none of my business. They might decide to change the one I'm in, and I'm perfectly happy there. Probably only a year or so left before I pack up.

I was just curious as to why they don't offer salary sacrifice now. Also , if it's beneficial, you'd think every single scheme would be like that. Yet it seems that sal sac is still very much in the minority.

Bear777

Marcon said:

eastcorkram said:

If salary sacrifice is a good thing, for the employer , why don't more of them do it?

Often because they simply didn't know they could, or they think it's too much hassle to explain to a bemused and suspicious workforce (look at the number of posts on this forum anxiously enquiring what the employer's up to...).

eastcorkram said:

Where I am , (approx 600 employees), the scheme I'm in is salary sacrifice. I started there 12 years ago, and joined the scheme shortly afterwards. Most of my colleagues were not in the scheme. When auto enrollment came in, the scheme I'm in was closed, as in no one else could join, but it stayed the same for those already in it. 

Everyone else was put into the new one, which is definitely not salary sacrifice. Seems to me, the employer would save a lot of NI by putting everyone into the same scheme as me. 

The employer could save a lot of NI by offering salary sacrifice in the new scheme. Ask them why they don't - especially in the light of the first question asked in your post. 

Marcon. I wrote out a proposal last night and will submit to my boss over the next week or so m. In it I have outlined all the figures, the contribution expectation and I have also (cheekily maybe) suggested that they increase their agreed salary percentage contribution so that we ultimately ‘share’ the NIC savings they make. So in essence it still means they are saving £1k per annum for doing basically a paper exercise which should take an hour or so. Cheeky or not by me lol?? 

The final query I have is do I have to even contribute a minimal amount of say £1 or something or can my contributions be 100% from my employer? It’s a fairly standard Aviva Stakeholder pension - should I check with them directly? 

MallyGirl

eastcorkram said:

@Marcon

I'm asking them nothing 😄 it's none of my business. They might decide to change the one I'm in, and I'm perfectly happy there. Probably only a year or so left before I pack up.

I was just curious as to why they don't offer salary sacrifice now. Also , if it's beneficial, you'd think every single scheme would be like that. Yet it seems that sal sac is still very much in the minority.

maybe it has a higher admin overhead?

Marcon

Bear777 said:

Marcon said:

eastcorkram said:

If salary sacrifice is a good thing, for the employer , why don't more of them do it?

Often because they simply didn't know they could, or they think it's too much hassle to explain to a bemused and suspicious workforce (look at the number of posts on this forum anxiously enquiring what the employer's up to...).

eastcorkram said:

Where I am , (approx 600 employees), the scheme I'm in is salary sacrifice. I started there 12 years ago, and joined the scheme shortly afterwards. Most of my colleagues were not in the scheme. When auto enrollment came in, the scheme I'm in was closed, as in no one else could join, but it stayed the same for those already in it. 

Everyone else was put into the new one, which is definitely not salary sacrifice. Seems to me, the employer would save a lot of NI by putting everyone into the same scheme as me. 

The employer could save a lot of NI by offering salary sacrifice in the new scheme. Ask them why they don't - especially in the light of the first question asked in your post. 

Marcon. I wrote out a proposal last night and will submit to my boss over the next week or so m. In it I have outlined all the figures, the contribution expectation and I have also (cheekily maybe) suggested that they increase their agreed salary percentage contribution so that we ultimately ‘share’ the NIC savings they make. So in essence it still means they are saving £1k per annum for doing basically a paper exercise which should take an hour or so. Cheeky or not by me lol?? 

The final query I have is do I have to even contribute a minimal amount of say £1 or something or can my contributions be 100% from my employer? It’s a fairly standard Aviva Stakeholder pension - should I check with them directly? 

If your employer is happy for it to be 100% salary sacrifice, then you don't have to contribute anything by way of a personal contribution. 

Good luck!

Marcon

MallyGirl said:

eastcorkram said:

@Marcon

I'm asking them nothing 😄 it's none of my business. They might decide to change the one I'm in, and I'm perfectly happy there. Probably only a year or so left before I pack up.

I was just curious as to why they don't offer salary sacrifice now. Also , if it's beneficial, you'd think every single scheme would be like that. Yet it seems that sal sac is still very much in the minority.

maybe it has a higher admin overhead?

Not once it's set up and the necessary comms to employees have been dealt with. 

There are plenty of schemes where salary sacrifice wouldn't work - eg where the employer pays minimum wage (you can't salary sacrifice below minimum wage), or where there are a lot of part-timers who don't earn enough to pay tax (their personal contributions to a relief at source scheme would still get the tax top-up even though they didn't pay any tax in the first place; salary sacrifice might give an NI saving, but wouldn't give them any sort of income tax benefit).

East - maybe you'd get a bonus for suggesting it...?!

retiringtoosoon

dont discount employer apathy - if i know people, it's too much hassle to rock the boat / instigate the change despite the benegfits to all. Change is hard.

Albermarle

retiringtoosoon said:

dont discount employer apathy - if i know people, it's too much hassle to rock the boat / instigate the change despite the benegfits to all. Change is hard.

There is also maybe an element that the employer is suspicious of it, like many employees are.
It is a tax loophole at the end of the day, and maybe some employers avoid it for that reason, even though currently it is perfectly legal.