Company changing pension to salary sacrifice

BoBoDobie

My company is introducing paying our pensions by salary sacrifice which apparently is more tax efficient and reduces the amount of NI contributions I pay so slightly increasing my take home pay. I’m not sure if I should do it or opt out of it and continue paying as I do now? Will it effect my state pension is the biggest concern. 

Brie

It won't affect your SP as you only need a small portion of the tax year to get your benefit as long as you're on a decent wage.  i.e I was on £26k and it didn't affect mine.

cloud_dog

There is no direct negative effects on you.  If you are a basic rate tax payer £100 in you pension currently costs you £80, where as under SS it would (currently) cost you £70 (going to £72 from April).

You need to understand that this actually reduces your gross salary from your contracted level down to contracted salary minus the contribution/sacrificed amount.

Most organisations (mortgage lenders etc) nowadays are aware of SS, but logically you will have a slightly lower reported salary. 

ColdIron

Do it, there are practically no downsides

It shouldn't affect your SP. You will pay less NI (and so does your employer, some share the benefit with you). If you pay tax at the higher rate your whole tax relief goes into your pension rather than just 20% leaving you to reclaim the other 20% from HMRC, which won't

A no brainer for most

Exodi

Fantastic news for you, most people would worship the opportunity for salary sacrifice.

Think of it like this, you're paid £30,000 per year (£2,500 per month):

Option a) Workplace Pension (5% employee contribution + 3% employer contribution).

£100 is deducted from your net pay and added to your pension as an employee contribution. As you have already paid tax on this (and the idea is to prevent paying income tax twice), as you would also be taxed on it when it is withdrawn in retirement, you would be reimbursed the tax at the basic rate, so in this case £25 making your total employee contribution £125 (5% of £2,500). Your employer will also add £75 (3% of £2,500).

As the £100 was deducted from your net pay, you would have paid £25 in income tax (basic rate of 20% on £125) and £12.50 in national insurance ((currently) 10% of £125).

While you receive tax relief on the income tax, you'll note that you do not receive your national insurance back.

Option b) Salary Sacrifice (5% employee sacrifice + 3% employer contribution).

£125 is deducted from your gross pay and added to your pension, along with the employee contribution in one amount totaling £200 (so the same as the above with a minor caveat that you may also get employer NI split added on this - more on that below). As this is deducted before tax is calculated, you would not pay tax (but to be fair, in Option A above, basic rate tax is reimbursed, so you're neutral so far), however you also don't pay any national insurance on this amount, unlike the above. So you would be better off the £12.50 in the above example.

Also, employers have to pay employer national insurance behind the scenes (it usually has no effect on employees). As the pension contribution in the first option is deducted from net pay, the employer has to pay £17.25 (13.8% of £125) on the amount that you are contributing to your pension. In salary sacrifice, the employer is not obliged to pay employer national insurance on this amount as it is deducted before the tax is calculated, so they save it. Many employers offer to share this saving with the employee (and some are nice enough to give it all to the employee).

An employer deciding to move to salary sacrifice is usually so they can slightly reduce the employer NI they pay.

So in the two examples above you would benefit £21.13 vs the workplace pension... not a bad amount considering the size of the contributions. You can imagine the savings when scaled up to people investing £1k+ p/m into their pensions. Hope that makes it clear, also please note that nominal tax rates vary depending on income.

BoBoDobie

Super thank you all most helpful and much appreciated