Salary sacrifice vs personal contribution to SIPP

aaryal

Hi all, 

I'm trying to understand the Tax benefits of salary sacrifice vs paying into a SIPP. Grateful for your thoughts on the question below. 

* I have a small bonus coming this tax year. Employer has asked me if I would like to pay that directly into the workplace occupational pension. 

* let's suppose I am in 40% tax category, if I want to maximise my tax relief, I'm aware doing salary sacrifice gets me 40% back 

1) is there any difference if I just skip the salary sacrifice, take the post-tax pay into my bank account, and then put it into my private pension (SIPP with vanguard) instead? I instantly get 20% tax relief, and then I do self assessment to get the additional 20% correct? So is the end result of doing salary sacrifice vs taking net pay and then putting back into sipp is the same amount of total money correct?

2) assuming 1, is there any real benefit of doing salary sacrifice versus putting my net pay back into a SIPP?

3) I have rental income from a rental property which is obviously going to get taxed...lets suppose the tax from my rental income will be £1,000. Can I use the pension contribution to specifically offset that £1000 rental income tax? I heard something that pension tax relief actually offsets NI tax rather than income tax? Am I correct?

4) If 3) is correct how does the maths work? 
Let's say rental income tax is £1,000 once again. In order to offset the £1,000 do I pay in £1,500 into the pension (the tax man will give another 1000, boosting the pension contribution to 2500). So I am putting in 1500 to get the 1000 top up which will offset the 1000 that I needed to pay on rental income. Am I thinking about this correctly? 

Thanks again folks. Always appreciate your insights  

Dazed_and_C0nfused

1.  There is no fixed extra 20%, the higher rate relief due depends on your overall tax position.  You might be contributing say £10k but have only paid higher rate tax on £1.

2.  Other than for very low earners you avoid paying NI on the amount sacrificed.  And it's much easier.

3.  No.  Salary sacrifice will reduce your taxable income.  Relief at source contributions will increase your basic rate band.  Neither "offset" anything relating to rental income.  But they may change the tax rate rental income is taxed at.

4.  Forget that, you have invented a scenario that doesn't exist.  The rental income will be taxed at 20%, 20% and 40% or 40%.  Your pension contributions can help determine which of those three things will apply.

MallyGirl

As well as avoiding some employee NI your employer might also contribute some or all of the 13.8% employer NI saving they make on your sacrificed amount. Mine gives nothing but my OH gets the lot.

aaryal

MallyGirl said:

As well as avoiding some employee NI your employer might also contribute some or all of the 13.8% employer NI saving they make on your sacrificed amount. Mine gives nothing but my OH gets the lot.

OK got it. So what turns out to be better for getting money back? Salary sacrifice or putting that post-tax bonus money back into a SIPP and getting tax relief?

I'm aware it depends on a lot of things, just trying to work out which saves me more money. 

aaryal

Dazed_and_C0nfused said:

1.  There is no fixed extra 20%, the higher rate relief due depends on your overall tax position.  You might be contributing say £10k but have only paid higher rate tax on £1.

2.  Other than for very low earners you avoid paying NI on the amount sacrificed.  And it's much easier.

3.  No.  Salary sacrifice will reduce your taxable income.  Relief at source contributions will increase your basic rate band.  Neither "offset" anything relating to rental income.  But they may change the tax rate rental income is taxed at.

4.  Forget that, you have invented a scenario that doesn't exist.  The rental income will be taxed at 20%, 20% and 40% or 40%.  Your pension contributions can help determine which of those three things will apply.

Thanks very useful. Same question as the other post. Which generally turns out better? Salary sacrifice or putting that post tax bonus money back into a SIPP? For this scenario let's just pretend the entire bonus would have got taxed at the 40% bracket. If you're able to put a simple example e.g. Bonus of 10k, that would be much alpreciated: what the NI saving on the 10k versus what is the tax relief if I take that post tax bonus (e.g. About 6k post tax?) and put it back into a SIPP for tax relief

Thanks 

NoMore

aaryal said:

MallyGirl said:

As well as avoiding some employee NI your employer might also contribute some or all of the 13.8% employer NI saving they make on your sacrificed amount. Mine gives nothing but my OH gets the lot.

OK got it. So what turns out to be better for getting money back? Salary sacrifice or putting that post-tax bonus money back into a SIPP and getting tax relief?

I'm aware it depends on a lot of things, just trying to work out which saves me more money. 

 As you have already been told salary sacrifice is better because you save on ni as well as income tax. Sipp you only save on income tax. 

aaryal

NoMore said:

aaryal said:

MallyGirl said:

As well as avoiding some employee NI your employer might also contribute some or all of the 13.8% employer NI saving they make on your sacrificed amount. Mine gives nothing but my OH gets the lot.

OK got it. So what turns out to be better for getting money back? Salary sacrifice or putting that post-tax bonus money back into a SIPP and getting tax relief?

I'm aware it depends on a lot of things, just trying to work out which saves me more money. 

 As you have already been told salary sacrifice is better because you save on ni as well as income tax. Sipp you only save on income tax. 

Thanks much appreciated. 

Sarahspangles

There might be scenarios where having a slightly lower amount going into a SIPP still works to your advantage, because you plan to use your SIPP in years when you aren't working, before your other pensions commence. Also some estate planning advantages.