Salary sacrifice - does it count as employer contribution?

breaking_free

Hi all.

I'm a contractor employed via an umbrella company inside IR35.

The umbrella company does not contribute to my pension. If it's of any relevance, I work in the UK for a French branch of an American company (Moody's if you want to know).

I am salary sacrificing £1200 per month into a SIPP so here's my question. Should that £1200 count as an employee contribution or an employer contribution?

Currently, when the umbrella company sends the money to Fidelity (my SIPP provider) it is classed as an Employer Contribution; this doesn't seem right (or fair!) to me because it's my own money, not the employer's, and of course I don't get the 25% tax relief.

If I've set this up all wrong, what exactly should I do? Yes I will obviously contact the umbrella company as well but wanted to get the wisdom of you all first.
Thank you.

HappyHarry

Salary sacrifice is an employer contribution.

You don’t get tax relief because you haven’t paid tax on the contribution.

Salary sacrifice is usually better as as you save your personal national insurance contributions on the pension contribution.

edit: as it is your own company you are also saving the 13.8% employer national insurance on the pension contribution. Happy days!

breaking_free

Oho, I see. That does make sense and now I feel a bit daft for asking. Thanks so much for your prompt response :-)

Aretnap

Salary sacrifice is an employer contribution - you agree to be paid a lower salary in return for your employer making a larger contribution to your pension.

The money goes straight from your employer to your pension - the taxman never sees it. There is no tax relief because you never paid tax on the money in the first place. This is different from an employee contribution where you pay your own TAXED money into your pension, and the tax relief is essentially a refund of the income tax that you had already paid on the money that you contributed.

Salary sacrifice is a better deal than employee contributions for most people because not only do you save income tax on the money paid in, you also save the national insurance that you would have paid on it. It would be nice if you could save the income tax AND the national insurance AND get a 25% top up on top of that... but we probably have to be realistic in what we hope for.

CrickJon

Aretnap said:

Salary sacrifice is an employer contribution - you agree to be paid a lower salary in return for your employer making a larger contribution to your pension.

The money goes straight from your employer to your pension - the taxman never sees it. There is no tax relief because you never paid tax on the money in the first place. This is different from an employee contribution where you pay your own TAXED money into your pension, and the tax relief is essentially a refund of the income tax that you paid on the contributions.

Salary sacrifice is a better deal than employee contributions for most people because not only do you save income tax on the money paid in, you also save the national insurance that you would have paid on it. It would be nice if you could save the income tax AND the national insurance AND get a 25% top up on top of that... but we probably have to be realistic in what we hope for.

So, if you decide to make say a 10% personal contribution in salary sacrifice and your business contributes say 8%, your gross pay is 10% less but the entire 18% pension payment is seen as an employer contribution?

HappyHarry

CrickJon said:

Aretnap said:

Salary sacrifice is an employer contribution - you agree to be paid a lower salary in return for your employer making a larger contribution to your pension.

The money goes straight from your employer to your pension - the taxman never sees it. There is no tax relief because you never paid tax on the money in the first place. This is different from an employee contribution where you pay your own TAXED money into your pension, and the tax relief is essentially a refund of the income tax that you paid on the contributions.

Salary sacrifice is a better deal than employee contributions for most people because not only do you save income tax on the money paid in, you also save the national insurance that you would have paid on it. It would be nice if you could save the income tax AND the national insurance AND get a 25% top up on top of that... but we probably have to be realistic in what we hope for.

So, if you decide to make say a 10% personal contribution in salary sacrifice and your business contributes say 8%, your gross pay is 10% less but the entire 18% pension payment is seen as an employer contribution?

Yes.          .

Grumpy_chap

breaking_free said:

Hi all.

I'm a contractor employed via an umbrella company inside IR35.

The umbrella company does not contribute to my pension. If it's of any relevance, I work in the UK for a French branch of an American company (Moody's if you want to know).

I am salary sacrificing £1200 per month into a SIPP so here's my question. Should that £1200 count as an employee contribution or an employer contribution?

Currently, when the umbrella company sends the money to Fidelity (my SIPP provider) it is classed as an Employer Contribution; this doesn't seem right (or fair!) to me because it's my own money, not the employer's, and of course I don't get the 25% tax relief.

If I've set this up all wrong, what exactly should I do? Yes I will obviously contact the umbrella company as well but wanted to get the wisdom of you all first.
Thank you.

It is Employer Contribution because the UC make the payment to Fidelity from the UC funds (arising from your day-rate) before processing payroll elements of employer NI, employee NI, income tax.  
The alternative would be to process payroll employer NI, employee NI, income tax and then pay you and then for you to make the pension contributions and recover the 25% tax relief uplift.  That will be more expensive for you.
The way the UC are processing this is the most advantageous for the individual.

Gary1984

breaking_free said:

The umbrella company does not contribute to my pension. 

Currently, when the umbrella company sends the money to Fidelity (my SIPP provider) it is classed as an Employer Contribution; this doesn't seem right (or fair!) to me because it's my own money, not the employer's, and of course I don't get the 25% tax relief.

You're wrong here. Until you get your payslip and get paid it absolutely is the umbrella's money. They invoice Moody's for the work their employee (you) carried out. They then use that money to make pension contributions and pay you through PAYE and also retain some for themselves.

What umbrella are you with? It's worth checking that they're paying the full employer NI savings into your SIPP. Not all do.

saajan_12

If you salary sacrifice £100, that full £100 goes to the pension.

If you didn't, you'd get the net amount ie £80, and then get 25% uplift taking you back to 80 + 20 = £100. You and the employer would also pay national insurance on the pay which doesn't get returned.