Salary sacrifice

auser99

I know this one comes up often, and I've tried to read round the subject, but wonder if the thread experts could give me the general gist on this.

With salary, the benefit value of the company car and Bupa and savings interest, I'll probably be about 3-4k over the 40% boundary. That's with 6% already going out of the salary into a pension reducing the taxable salary already.

Is salary sacrifice as straight forward as the amount you put in comes off the taxable income?
e.g. 54k total, put 5k into the pension and you are thus at 49k, and under the threshold?
I've been slightly confused by people talking about 20% and 40% tax relief, rather than the basic premise above.

Other factors at play are a potential July cost of living increase, which could be 2-4% and the company car going back in November, meaning the benefit value of around 8500 will go to 7500 or so in cash. 

I know the pension fund could swing wildly up or down and potentially lose the amount that goes in, and that you can't take out of there until 55 (maybe it'll be 57). Plus for a mortgage application you'd have to apply using your reduced salary not the original one.
But is there anything else to factor in?

There's a once a year opportunity to do salary sacrifice at my work, with the window closing soon.

Marcon

auser99 said:

I know this one comes up often, and I've tried to read round the subject, but wonder if the thread experts could give me the general gist on this.

With salary, the benefit value of the company car and Bupa and savings interest, I'll probably be about 3-4k over the 40% boundary. That's with 6% already going out of the salary into a pension reducing the taxable salary already.

Is salary sacrifice as straight forward as the amount you put in comes off the taxable income?
e.g. 54k total, put 5k into the pension and you are thus at 49k, and under the threshold?
I've been slightly confused by people talking about 20% and 40% tax relief, rather than the basic premise above.

Other factors at play are a potential July cost of living increase, which could be 2-4% and the company car going back in November, meaning the benefit value of around 8500 will go to 7500 or so in cash. 

I know the pension fund could swing wildly up or down and potentially lose the amount that goes in, and that you can't take out of there until 55 (maybe it'll be 57). Plus for a mortgage application you'd have to apply using your reduced salary not the original one.
But is there anything else to factor in?

There's a once a year opportunity to do salary sacrifice at my work, with the window closing soon.

Yes. Your salary is contractually reduced by £x on the basis that the employer will contribute £x to your pension on your behalf.

You and the employer both save NI, because you are now being paid a lower salary.

Employer pension contributions are made gross to your pension. There is no tax charge to you (because pension contributions aren't deemed a taxable or NI-able 'benefit in kind'), and the employer gets corporation tax on the contribution as a trading expense.

ColdIron

auser99 said:

Is salary sacrifice as straight forward as the amount you put in comes off the taxable income?
e.g. 54k total, put 5k into the pension and you are thus at 49k, and under the threshold?

If you SS £5,000 then your P60 salary is reduced by £5,000

I've been slightly confused by people talking about 20% and 40% tax relief, rather than the basic premise above.

Tax relief does not apply to SS as it's untaxed. It does apply to the more common Relief at Source contributions which are paid from already taxed income

auser99

Thanks @ColdIron and @Marcon.

I assume it would be the case where I'll spend 2024/25 at the higher tax level, then it'd sort itself out for 25/26 with a rebate etc?

ColdIron

auser99 said:

I assume it would be the case where I'll spend 2024/25 at the higher tax level,

I don't understand. I thought you were SSing to take you below the HRT threshold

then it'd sort itself out for 25/26 with a rebate etc?

What's happening in 2025/26? There is no rebate with SS as it comes from untaxed income

Sorry if I've misunderstood

Sarahspangles

auser99 said:

Thanks @ColdIron and @Marcon.

I assume it would be the case where I'll spend 2024/25 at the higher tax level, then it'd sort itself out for 25/26 with a rebate etc?

Are you expecting a March payslip which shows lower than usual taxable income, as you’ve sacrificed salary?

Marcon

auser99 said:

Thanks @ColdIron and @Marcon.

I assume it would be the case where I'll spend 2024/25 at the higher tax level, then it'd sort itself out for 25/26 with a rebate etc?

You say there's a 'once a year' chance to salary sacrifice 'with the window closing soon', which suggests you are contemplating salary sacrifice but haven't actually done so for the current tax year 23/24 (and it's likely to be far too late for the March payroll), but plan to do so from April 2024.

If that's the case, then you'll pay higher rate tax for the current tax year 23/24. You say you are already having 6% contributions deducted from your taxable salary (ie gross, before it has been taxed), so you are getting full tax relief at your highest rate.

Otherwise, if your pension contributions are currently taken from your net (ie post-tax) salary, you would get basic rate tax credited to your pension pot, and would then reclaim any higher rate relief via self assessment or direct from HMRC for 23/24.

If you salary sacrifice, your 24/25 salary will be lower, so you'll pay less tax (because you have a lower salary). There's no rebate involved, because you won't have paid tax on the sacrificed salary.

auser99

@ColdIron @Marcon
@Sarahspangles

Yes, plan is to do the SS from the April payroll for the new tax year.

I think I'm probably mixing in how savings interest works, with the monthly salary workings.

Savings interest being collated in the autumn after the tax year, so this year's (2023/24) being collated in Autumn 2024 and applied via a tax code change in 2025/26.

Whereas monthly payroll is more fluid and will decide if you'd be a 20% or 40% tax payer based on your monthly wage slip x 12?

I'd only be hitting the 40% threshold with the savings interest gained in 2023/2024, so I assume they'd collate the savings interest this autumn, see it needs 40% deducted, and then issue a new tax code for 2025/26?

Whereas next year 2024/25, with the salary sacrifice, the savings interest wouldn't take me into 40%, so would only be retrospectively billed at 20%.

Thanks again - this is probably more straight forward than I'm making it out, and probably conflating all sorts of stuff into 1 query.