Tax Query - Pension, Sole Trader and Salary Sacrifice Scheme

Jack1959

Hello

I work 12 hours for a company earning £10k a year. I also receive a small Civil Service Pension of £380 a month. I am 65 years of age.  Last year I was above the tax threshold I was getting taxed, so was advised by my accountant to put 100% of my weekly wage, from April this year, into a salary sacrifice scheme to avoid my weekly wage and my pension being taxed as I was above the threshold. 

I started working as self employed 2 years ago. I pay my own tax by self assessment my earnings fall within the basic tax bracket. I am treated separately for tax purposes in each of my roles.  I aways thought I was taxed on my total earnings so I wondered if this is correct? 
  
Next June, I will start to receive my state pension, as I am 66.  If I continue to pay my wage into the salary sacrifice and continue to pay tax for my self-employed work by self-assessment, am I right in thinking I will only pay tax on my 2 pensions on the amount they exceed the personal allowance (£12,570) by? 

After June 2025, if I continue working as self employed, draw my 2 pensions, and continue paying a 100% of my weekly wage into salary sacrifice will this impact on the amount of tax I pay for my self employed business or will my self employed business continue to be treated separately? 

Tax seems incredibly complicated and I want to make sure that I am not falling foul of the rules and end up shelling out thousands in back tax plus interest.

Thank you




 

Phoenix72

First of all, you cannot pay 100% of your earnings via salary sacrifice as you cannot sal sac below minimum wage. 

In addition, only the employer can arrange for this. You cannot instigate your own.

Marcon

Jack1959 said:

Hello

I work 12 hours for a company earning £10k a year. I also receive a small Civil Service Pension of £380 a month. I am 65 years of age.  Last year I was above the tax threshold I was getting taxed, so was advised by my accountant to put 100% of my weekly wage, from April this year, into a salary sacrifice scheme to avoid my weekly wage and my pension being taxed as I was above the threshold. 

I started working as self employed 2 years ago. I pay my own tax by self assessment my earnings fall within the basic tax bracket. I am treated separately for tax purposes in each of my roles.  I aways thought I was taxed on my total earnings so I wondered if this is correct? 
  
Next June, I will start to receive my state pension, as I am 66.  If I continue to pay my wage into the salary sacrifice and continue to pay tax for my self-employed work by self-assessment, am I right in thinking I will only pay tax on my 2 pensions on the amount they exceed the personal allowance (£12,570) by? 

After June 2025, if I continue working as self employed, draw my 2 pensions, and continue paying a 100% of my weekly wage into salary sacrifice will this impact on the amount of tax I pay for my self employed business or will my self employed business continue to be treated separately? 

Tax seems incredibly complicated and I want to make sure that I am not falling foul of the rules and end up shelling out thousands in back tax plus interest.

Thank you




 

Why isn't your accountant helping you out with tax issues, which should be very basic (and quick, so shouldn't cost a fortune in fees) questions for them to deal with - and they know your financial affairs in detail?

Although they don't actually seem to understand that you can't salary sacrifice below minimum wage...bit worrying.

dunstonh

Next June, I will start to receive my state pension, as I am 66.  If I continue to pay my wage into the salary sacrifice and continue to pay tax for my self-employed work by self-assessment, am I right in thinking I will only pay tax on my 2 pensions on the amount they exceed the personal allowance (£12,570) by? 

If you are self employed, then you are not paying yourself a wage.  You are taxed on your profit.   This also means you cannot do salary sacrifice as you don't have a salary.

If you were a shareholding director, then what you say would be possible but not if you are self employed.

Marcon

dunstonh said:

Next June, I will start to receive my state pension, as I am 66.  If I continue to pay my wage into the salary sacrifice and continue to pay tax for my self-employed work by self-assessment, am I right in thinking I will only pay tax on my 2 pensions on the amount they exceed the personal allowance (£12,570) by? 

If you are self employed, then you are not paying yourself a wage.  You are taxed on your profit.   This also means you cannot do salary sacrifice as you don't have a salary.

They can in respect of their part time employment:

Jack1959 said:

I work 12 hours for a company earning £10k a year. I also receive a small Civil Service Pension of £380 a month. I am 65 years of age.  Last year I was above the tax threshold I was getting taxed, so was advised by my accountant to put 100% of my weekly wage, from April this year, into a salary sacrifice scheme to avoid my weekly wage and my pension being taxed as I was above the threshold. 

I started working as self employed 2 years ago. I pay my own tax by self assessment my earnings fall within the basic tax bracket. I am treated separately for tax purposes in each of my roles.  
  
Next June, I will start to receive my state pension, as I am 66.  If I continue to pay my wage into the salary sacrifice and continue to pay tax for my self-employed work by self-assessment, am I right in thinking I will only pay tax on my 2 pensions on the amount they exceed the personal allowance (£12,570) by? 



 

Secret2ndAccount

Salary sacrifice is just a very efficient way of putting money into your pension. The money goes straight from your employer to your pension without ever getting close to your pay-checque. You don't pay any tax on the sacrificed amount (because you never earned it). The bonus is that you don't pay any NI on the amount either (because ... you never earned it). There are two howevers:
However 1: Not all employers offer salary sacrifice. All you can do is ask.
However 2: Your employer is required to pay you at least the Minimum Wage. So you can't sacrifice your whole salary. Then your earnings would be zero per hour, and your employer would be breaking the law. It looks like you are earning about £20/hr, and the minimum wage is £11.44, so you can only sacrifice about 40% of your employment earnings.
There are other ways to add to a pension and save tax. Sal Sac is just the best because it saves NI too.
If you have an existing pension, you can most likely make extra one-off payments into it. Or you can open a SIPP (very easy to do) and pay into that. In each case, either you will avoid a tax deduction from your pay, or the taxman will chip in an extra 25% to your pension, so you effectively end up not paying tax.
Using these methods, you can pay in all of your earnings, and all of your profits. Actually, you likely pay in 80% of those numbers, then the taxman adds his bit to bring the totals up to match your earnings.
You shouldn't pay in more than your earnings + profit because you aren't allowed the tax saving beyond that. You might need to guesstimate your business profits because you have to make the SIPP contributions before the end of the tax year.

Summary:
Salary sacrifice about 8k into pension if possible
Pay 80% of the rest of your salary into a SIPP
Add whatever you can afford from your business profits (up to 80% of all of it)

Some people hit this pretty hard in the couple of years before retirement, using up savings to mke maximum contributions. If you are a 20% taxpayer now, and in retirement, you make 6% on the round-trip in and out of your pension. Even more if you can sal-sac