Pension Contributions to stay under £100k

ElBaifo

Hi,

I am in the very fortunate position to have been offered a role with £120,000 salary, there are limited other benefits but the business is open to splitting this as required for my maximum benefit.

For context I am not married but we have 3 children (0,3 & 5) meaning I currently have 1 in nursery and next feb will have 2 getting free hours as well as tax free childcare. I have no other income streams, benefits in kind or deductions to consider. I would like to stay below the £100k ANI (adjusted net income) calculation to maintain these.

i also want to maximise money in my pocket with the effective 60-65% tax on anything over 100k, so open to being flexible on planning for future. 

What would the results of the below options be for Tax, N.I. & childcare benefits, as well as any other consideration?:

1. take £120k salary and contribute myself to a private pension from my net salary (after tax).

2. Take £100k (or just under) salary and have company contribute £20k to my nest workplace pension prior to tax deduction

3. Take £120k and contribute £20k to my nest workplace pension prior to tax deduction.

4. Set it up as a salary sacrifice for the company to contribute £20k to the nest pension.

HMRC guidelines are clear as mud to me and they just contradict themselves in their forum, so appreciate your thoughts and help in advanced

Grumpy_chap

ElBaifo said:

Hi,

I am in the very fortunate position to have been offered a role with £120,000 salary, there are limited other benefits but the business is open to splitting this as required for my maximum benefit.

For context I am not married but we have 3 children (0,3 & 5) meaning I currently have 1 in nursery and next feb will have 2 getting free hours as well as tax free childcare. I have no other income streams, benefits in kind or deductions to consider. I would like to stay below the £100k ANI (adjusted net income) calculation to maintain these.

i also want to maximise money in my pocket with the effective 60-65% tax on anything over 100k, so open to being flexible on planning for future. 

What would the results of the below options be for Tax, N.I. & childcare benefits, as well as any other consideration?:

1. take £120k salary and contribute myself to a private pension from my net salary (after tax).

2. Take £100k (or just under) salary and have company contribute £20k to my nest workplace pension prior to tax deduction

3. Take £120k and contribute £20k to my nest workplace pension prior to tax deduction.

4. Set it up as a salary sacrifice for the company to contribute £20k to the nest pension.

HMRC guidelines are clear as mud to me and they just contradict themselves in their forum, so appreciate your thoughts and help in advanced

Option 4 - if the employer will facilitate a SS scheme then that will be the most favourable for tax for both you and them.
The ANI calculation needs to consider any other income you have, interest / dividends, workplace benefits (car, healthcare etc) and other offsets (gift aid).
For retirement planning, you may wish to consider whether pension contributions around £20k will generate sufficient retirement income based upon an employment income level of around £100k or more.

kinger101

With potentially losing out on free nursery hours and the £2K childcare contribution, you face hitting the absurdity of an effective marginal tax rate of more than 100 percent.

So getting your adjusted net income below £100k is very sensible.

As well as this year's AA of £60K, you can also use any unused allowance from  the previous three years.

In the event this is all used up, you have other options.  

Over-contributing to your pension has the effect of reducing your ANI while incuring a tax charge on the overpaid amount. It is essentially double taxation, as you'll get no relief on the amount paid in but pay tax again in withdrawal.  But it can be better than the alternative option if losing funded childcare.

You can also make gift aid charity contributions in the current tax year and deem they were made in the previous year.  This can be useful if you discover your ANI is slightly over the threshold.

ElBaifo

Thanks both, what is the difference between salary sacrifice and the other options & how would I get my employer to set it up? - they’re willing to help as best they can.

Do all versions bring the ANI under £100k? 

How does the double tax on increased personal contributions work?

I read so many conflicting responses from HMRC on the matter & really want to know is anyone in a similar situation and how they do it. (There would be no other income or benefits in kind to consider, so should be quite a simple calculation if someone knows how to do it!)

Ferro

If you salary sacrifice £20000 you are reducing your gross salary to £100000. 

However your net will decrease by ‘only’ £7600. 

For this cost £20000 will be added to your pension and you will benefit from the free childcare. 

ElBaifo

Thanks, but I do t understand how that is different from straight out agreeing a salary of £100k and having the company put £20k in the pension? 

Also I read several parts of the HMRC forum that salary sacrifice isn’t counted in the ANI calculation. So would it not be safer to agree a £99,999.99 salary in the contract with an employer contribution of £20k (or a little more as they will save on Corperation tax I believe?).

Dazed_and_C0nfused

ElBaifo said:

Thanks, but I do t understand how that is different from straight out agreeing a salary of £100k and having the company put £20k in the pension? 

Also I read several parts of the HMRC forum that salary sacrifice isn’t counted in the ANI calculation. So would it not be safer to agree a £99,999.99 salary in the contract with an employer contribution of £20k (or a little more as they will save on Corperation tax I believe?).

You cannot deduct salary sacrifice contributions when calculating your ANI as they are employer contributions.

But be ause you sacrificed the salary in the first place you have £20k less taxable income (which is all part of your ANI) to start with.

So salary £120k with £20k sacrificed = £100k taxable pay.

ElBaifo

Ok, 

thanks all for the clarity!

So I will go with a £120,000 salary and sacrifice £20,000.01 (plus what ever the basic pension of both our contributions are) for employer pension contributions to bring it down to £99,999.99 and put a clause in the contract to keep the sacrifice adjustable and transferable to use on any future benefits the company implements. I will keep my pension employee contribution at zero.

In this months pay get them to pay it 100% salary, as I will be well under £100k for this financial year (currently £80k).

Grumpy_chap

It might be worth sacrificing a bit more to the pension and allowing for some head-room in the calculation.

Two things happen at the £100k threshold:

• Withdrawal of the Personal Allowance.  If you slightly err in this calculation, it is a sliding scale, so you lose a few £s of PA and the impact is not that big.
• Loss of childcare contribution.  This is a cliff-edge.  Go over £100k by the smallest of fractions, lose the whole entitlement.

You are also looking at this with consideration of your employment income only.  Have you calculated your actual ANI, taking everything into account?

• It is unusual that a job paying a salary of £120k (or £100k plus £20k pension) does not have any elements resulting in BIK liability over-and-above the base pay.
• Many people with £100k or more salary will have some savings or dividend or similar income arising that is outside of tax-shelter protection.  ANY other income increases ANI.

If the OP has been on £80k per year, then getting ANI down to £95k and pension at £25k gives the margin for error in assessing ANI and avoids the risk of tipping over the threshold and losing the full value of childcare.

ElBaifo

Grumpy_chap said:

It might be worth sacrificing a bit more to the pension and allowing for some head-room in the calculation.

Two things happen at the £100k threshold:

• Withdrawal of the Personal Allowance.  If you slightly err in this calculation, it is a sliding scale, so you lose a few £s of PA and the impact is not that big.
• Loss of childcare contribution.  This is a cliff-edge.  Go over £100k by the smallest of fractions, lose the whole entitlement.

You are also looking at this with consideration of your employment income only.  Have you calculated your actual ANI, taking everything into account?

• It is unusual that a job paying a salary of £120k (or £100k plus £20k pension) does not have any elements resulting in BIK liability over-and-above the base pay.
• Many people with £100k or more salary will have some savings or dividend or similar income arising that is outside of tax-shelter protection.  ANY other income increases ANI.

If the OP has been on £80k per year, then getting ANI down to £95k and pension at £25k gives the margin for error in assessing ANI and avoids the risk of tipping over the threshold and losing the full value of childcare.

Noted, thanks. Honestly no other income, and also no benefits in kind (life insurance, medical insurance, company car, gym membership, discount, stock/sha etc.). A sudden salary increase of 50% and being the (significant) main earner of a family with 3 kids in London meant there was little excess to utilise in any investments. Only have a LISA saving for a house & minuscule exercised shares options from a former job (£1800 worth).

Pointers

Sorry to jump on this thread but this is very relevant to me. 

I have a 1 year old at child minders. As far as I'm aware I'm not currently eligible fro any support for him but understand that from September i could get up to 15 hours paid per week? 

My salary is £100k+ and I already make salary sacrifice deductions each year to lower my salary so that this then reduces the amount of tax that I pay. With the allowance currently being £60k I could put a large amount in and this would bring my salary below £100k. If I did this then would I qualify for the free 15 hours? If I put more in so that my salary was reduced to £85k then I would have more headroom. Is this a good idea? 

I try to put enough into my pension each year to make sure I'm not hit with the high margin tax rate once going over £100k. Like the poster I am the main earner for the family but my wife has a £40k salary.  

Noted that other benefits and incomes would be covered. I have BUPA cover through work but this isn't a big amount. The only other income that I have is interest on my ISAs. Should this be factored into my income? 

I also have a car lease through my company with the cost deducted as salary sacrifice and so pre-tax. I don' think this would count as a BIK though?