Confused with Net Pay / Relief at Source / Salary Sacrifce

zagfles

Cus said:

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?

Yes, you've misunderstood.

Sal sac £100 - £100 goes into the pension, your gross pay is down £100, your net pay is down £60 (ignoring NI)

RAS - to get £100 into the pension to match above - you pay in £80. Pension scheme claims £20 (1-2 months later). So £100 in pension.  You claim £20 back in your tax return (many months later). Same end result ignoring NI but a lot more complicated and having to wait to get the £20 refunded and the pension scheme having to wait to get the £20 BR tax relief.

Though you can get HMRC to adjust your tax code so you get the higher rate in year and not have to wait till they process your tax return. But sal sac is usually better and easier, and that's ignoring the NI benefit.

NoMore

If you ignore NI then there is no difference, there's no extra tax back early via relief, that's just mental accounting.

Salary sacrifice would reduce your Gross pay by £100, which as a 40% tax payer would other wise have only been £60 in your net pay. Assuming all of this £100 is in the higher tax rate bracket.

To get  £100 into pension with relief at source, you would contribute £80 into pension (basic tax relief would take this to £100) and you get the other £20 back to you, so it costs you £60 of your net pay to get £100 in pension.

So there's no difference (ignoring the NI saving that Salary Sacrifice gives you).

EDIT: Zagfles (above) beat me to it while I was writing this post

molerat

NoMore said:
So there's no difference (ignoring the NI saving that Salary Sacrifice gives you).

And student loan saving

Cus

Thanks to both,. I know that I don't make extra.   But with the ras I get £80 in the pension and £20 in my pocket. With ss I get £100 in my pension and nothing in my pocket. With nothing, I get £60 in my pocket and the government get £40.

So with ras I get the same as SS overall but £20 of it earlier?

NoMore

Cus said:

Thanks to both,. I know that I don't make extra.   But with the ras I get £80 in the pension and £20 in my pocket. With ss I get £100 in my pension and nothing in my pocket. With nothing, I get £60 in my pocket and the government get £40.

So with ras I get the same as SS overall but £20 of it earlier?

No, again your doing some mental accounting and thinking of the higher rate tax relief direct to you as a 'bonus', its not (again ignoring all other Sal Sac savings), your net pay will be exactly the same using SS or relief at source.

NoMore

Lets try explaining it this way:

We will only work with income tax and ignore NI and any other deductions.

Lets say you get paid £1000 a month in the 40% pay bracket, so your net pay for this would be £600, but you want to get £100 in your pension so you pay £80 (becomes £100 after basic tax relief) in to the pension. So you now have £520 (600-80) but then you claim the other £20 back so your net pay then rises back to £540.

Instead we do it via SS, so £1000 becomes £900 to you, £100 to pension. That £900 gets taxed at 40% which gives you (can you guess ?) .... £540.

Cus

NoMore said:

Cus said:

Thanks to both,. I know that I don't make extra.   But with the ras I get £80 in the pension and £20 in my pocket. With ss I get £100 in my pension and nothing in my pocket. With nothing, I get £60 in my pocket and the government get £40.

So with ras I get the same as SS overall but £20 of it earlier?

No, again your doing some mental accounting and thinking of the higher rate tax relief direct to you as a 'bonus', its not (again ignoring all other Sal Sac savings), your net pay will be exactly the same using SS or relief at source.

Thanks. If I opted out of SS, and I took £60 net pay (from £100 before tax) and put that into a SIPP, HMRC would up it to £75 I think. What additional tax relief would I be able to claim in my self assessment?

NoMore

Assuming the whole of the £75 is in the higher rate tax bracket you would claim £15 back so £75 in pension has cost you £45 (£60-15).

Your making the mistake of directly thinking of the £60 you put in the pension of having cost you £100 in gross, but the pension automatically gives you the first 20% back. You start from the Gross in the pension and work back, not from the net and then try and gross it up as you end up accounting for the basic tax relief twice. Its a horrible explanation so maybe somebody could explain this better, but its a common mistake people make with higher rate tax relief. 

Hoenir

Starting point is gross pay from which the (gross) pension contribution is deducted which finally leaves taxable pay. 

Depending on your personal tax situation. Relief will be automatically given at your highest rate of tax. 

PJM_62

Does this mean that someone who has a salary of 55,270 per year (ie 5k into 40% tax band) and has total of 8k pension payments during that year (net pay pension), 
gets 40% tax relief on 5k of pension ?
and 20% tax relief on the other 3k ?
and pays 20% income tax on all taxable salary (because pension payments dropped them back out of 40% band) ?
and has an allowance of 1k for savings interest and 20% tax over that ?