Confused with Net Pay / Relief at Source / Salary Sacrifce

Avro1995

Hi All,
I am really trying to get to grips with the way pensions work. I want to really understand the difference between net pay arrangement, relief at source.

Does HMRC pay the tax relief (lets say its 20% for now) into your pension for them on all arrangements? 

If you had 2 people with the same salary and both wanting to have the same amount in their pension (after all tax releif) will both options give you the same net take home pay? 

I really cant seem to get my head round it.

molerat

With sal sac you do not pay any pension.  Your pay is reduced by an amount and your employer pays into the pension.  Because you have not earned that money you do not pay tax and NI on that amount.  Salary reduced by £100 and £100 goes into the pension.

A net pay pension takes the money from your pay before tax so you do not pay tax on the amount put into the pension.  £100 taken from wages and £100 goes into the pension.

A relief at source arrangement take the money from your pay after it has been taxed.  £100 taken from wages and £100 goes into the pension  but the taxman adds another £25 to that so £125 in the pension.

For a person earning £30K with a code of 1257 and contributing 10% into a pension (and not living in Scotland)

Sal Sac would take home £1865.56 per month with £250 in their pension

Net pay would take home £1835.56 per month with £250 in their pension

RAS would take home £1785.56 per month with £312.50 in their pension

Alternatively with RAS you contribute 8% and take home £1835.56 per month with £250 in the pension.

The only real difference is that with Sal Sac you additionally save NI (and student loan) on the pay reduction.

Avro1995

molerat said:

With sal sac you do not pay any pension.  Your pay is reduced by an amount and your employer pays into the pension.  Because you have not earned that money you do not pay tax and NI on that amount.  Salary reduced by £100 and £100 goes into the pension.

A net pay pension takes the money from your pay before tax so you do not pay tax on the amount put into the pension.  £100 taken from wages and £100 goes into the pension.

A relief at source arrangement take the money from your pay after it has been taxed.  £100 taken from wages and £100 goes into the pension  but the taxman adds another £25 to that so £125 in the pension.

For a person earning £30K with a code of 1257 and contributing 10% into a pension

Sal Sac would take home £1865.56 per month with £250 in their pension

Net pay would take home £1835.56 per month with £250 in their pension

RAS would take home £1785.56 per month with £312.50 in their pension

Alternatively with RAS you contribute 8% and take home £1835.56 per month with £250 in the pension.

The only real difference is that with Sal Sac you save NI on the pay reduction.

Thats a really fantastic and clear explanation thank you so much. Is there a way to choose which one you do if you join an employer or is it 'whatever you get' scenario. Would I also be right in think9ing the following:

1) If there was a sole trader, the only way would be RAS as they can only pay from the net income?
2) why do people do a net pay over sal sac when its the same into you pension and less take home pay?

JoeCrystal

I can answer the second question. It is solely down to employer's decision if they plan to use salary sacrifice or not for their employees.

Marcon

Avro1995 said:

molerat said:

With sal sac you do not pay any pension.  Your pay is reduced by an amount and your employer pays into the pension.  Because you have not earned that money you do not pay tax and NI on that amount.  Salary reduced by £100 and £100 goes into the pension.

A net pay pension takes the money from your pay before tax so you do not pay tax on the amount put into the pension.  £100 taken from wages and £100 goes into the pension.

A relief at source arrangement take the money from your pay after it has been taxed.  £100 taken from wages and £100 goes into the pension  but the taxman adds another £25 to that so £125 in the pension.

For a person earning £30K with a code of 1257 and contributing 10% into a pension

Sal Sac would take home £1865.56 per month with £250 in their pension

Net pay would take home £1835.56 per month with £250 in their pension

RAS would take home £1785.56 per month with £312.50 in their pension

Alternatively with RAS you contribute 8% and take home £1835.56 per month with £250 in the pension.

The only real difference is that with Sal Sac you save NI on the pay reduction.

Thats a really fantastic and clear explanation thank you so much. Is there a way to choose which one you do if you join an employer or is it 'whatever you get' scenario. Would I also be right in think9ing the following:

1) If there was a sole trader, the only way would be RAS as they can only pay from the net income?
2) why do people do a net pay over sal sac when its the same into you pension and less take home pay?

It's whatever your employer offers - although if they don't offer salary sacrifice, it's worth asking if they are willing to do so. 

1. Correct
2. Not all employers have woken up to the advantages of salary sacrifice. Others don't want what they see as the hassle - and in some cases, particularly for smaller employers, it can be disproportionately 'costly' in terms of time and communication with employees. You only have to look at the number of anxious/suspicious questions on this board from employees who struggle to grasp what's on offer with salary sacrifice to realise that it isn't always 'that simple'. Another reason is that you can't salary sacrifice below minimum wage, so anyone on minimum wage quite simply can't be given that option.

Tucosalamanca

Marcon said:

2. Not all employers have woken up to the advantages of salary sacrifice. Others don't want what they see as the hassle - and in some cases, particularly for smaller employers, it can be disproportionately 'costly' in terms of time and communication with employees. You only have to look at the number of anxious/suspicious questions on this board from employees who struggle to grasp what's on offer with salary sacrifice to realise that it isn't always 'that simple'. Another reason is that you can't salary sacrifice below minimum wage, so anyone on minimum wage quite simply can't be given that option.

Which is crazy as they save Employer's NI Contributions (13.8%)
It's remarkable at how many Directors of SMEs don't fully understand pensions.
With recent pay awards seeing wage bills rise substantially, salary sacrifice can be a very useful tool for managing costs (and hopefully benefitting the employee as well).

I've had this conversation with friends. Some have brought it up at appraisals and it seems to go down well when negotiating salary. It also earns brownie points for the employee being savvy and saving the company money.
It's so simple but many seem to be completely unaware.

westv

Sal sac has also been useful to me this tax year as it has enabled me to keep under the 40% tax band and means my savings tax will be 20% above £1k rather than 40% above £500.

eastcorkram

Tucosalamanca said:

Marcon said:

2. Not all employers have woken up to the advantages of salary sacrifice. Others don't want what they see as the hassle - and in some cases, particularly for smaller employers, it can be disproportionately 'costly' in terms of time and communication with employees. You only have to look at the number of anxious/suspicious questions on this board from employees who struggle to grasp what's on offer with salary sacrifice to realise that it isn't always 'that simple'. Another reason is that you can't salary sacrifice below minimum wage, so anyone on minimum wage quite simply can't be given that option.

Which is crazy as they save Employer's NI Contributions (13.8%)
It's remarkable at how many Directors of SMEs don't fully understand pensions.
With recent pay awards seeing wage bills rise substantially, salary sacrifice can be a very useful tool for managing costs (and hopefully benefitting the employee as well).

I've had this conversation with friends. Some have brought it up at appraisals and it seems to go down well when negotiating salary. It also earns brownie points for the employee being savvy and saving the company money.
It's so simple but many seem to be completely unaware.

Which makes it even more puzzling, about where I work. The scheme I'm in uses salary sacrifice. I've been in this job, and the scheme, since 2011.

Sometime around 2015, anyone starting after that, and all the existing employees who were not in the pension scheme, are in the auto enrollment one, which does not use salary sacrifice. Currently around 600 people working here. 

xylophone

 are in the auto enrollment one, which does not use salary sacrifice. Currently around 600 people working here. 

Perhaps your colleagues might wish to discuss with management?


https://www.brightpay.co.uk/docs/23-24/automatic-enrolment/salary-sacrifice-for-auto-enrolment/using-salary-sacrifice-for-auto-enrolment/

Example

https://www.nestpensions.org.uk/schemeweb/helpcentre/contributions/calculating-contributions/salary-sacrifice.html

Hoenir

Tucosalamanca said:

Marcon said:

2. Not all employers have woken up to the advantages of salary sacrifice. Others don't want what they see as the hassle - and in some cases, particularly for smaller employers, it can be disproportionately 'costly' in terms of time and communication with employees. You only have to look at the number of anxious/suspicious questions on this board from employees who struggle to grasp what's on offer with salary sacrifice to realise that it isn't always 'that simple'. Another reason is that you can't salary sacrifice below minimum wage, so anyone on minimum wage quite simply can't be given that option.

Which is crazy as they save Employer's NI Contributions (13.8%)

Administration is a cost burden on a business. Employing people is far more expensive that people assume. 

Cus

Ignoring NI, if you are a 40% tax payer, then salary sacrifice means that £100 of pay goes straight into your pension, but if it's relief at source, then £60 goes to you, then another £20 gets added by HMRC. Then using your self assessment, then you get another £20 given back to you. If this is correct, then relief at source is better in a way, as you get some of your tax back straight away rather than waiting until age 55 or so to get it.  Have i misunderstood?