Salary Exchange

Cleagarr

Morning,

I've already posted elsewhere over the past 9 months about pension changes at my work (private school moving away from the TPS to a DC scheme). 

We are now being told that the school will be looking at a Salary Exchange scheme through Royal London. My understanding is that this is the most tax efficient way of saving into a DC scheme but my questions revolve around the 40% tax bracket and what the exchange does to my monthly income.

I currently earn £59,240 per year from my job and another £8,100 from a rental property. I don't use the rental income to live on (it is supporting my children and parents so don't count this in monthly 'salary'). At present my employer pays 23.68% into the scheme, I pay 10.2%. 

My first thought re the new scheme is, if I sacrifice £17,500 of my salary to put into my pension (pretty much 30%) do I avoid 40% tax on both the salary and rental earnings, and is this a good thing for my contributions? I appreciate there is an impact on potential finance applications but does it make a good option?

At the moment I can't work out what difference this sacrifice (less salary but also less tax and NI and minus current pension contributions) make to my actual monthly income.How might I find this and is this something my employer should be expected to provide?

Thanks.

Mark_d

Sacrificing 17500 salary reduces your taxable income by that.  So yes it would take you under the 40% tax bracket for the two income sources you mention.

However if you have taxable dividend income or taxable interest then these might push you in to the 40% bracket

Marcon

Cleagarr said:

Morning,

I've already posted elsewhere over the past 9 months about pension changes at my work (private school moving away from the TPS to a DC scheme). 

We are now being told that the school will be looking at a Salary Exchange scheme through Royal London. My understanding is that this is the most tax efficient way of saving into a DC scheme but my questions revolve around the 40% tax bracket and what the exchange does to my monthly income.

I currently earn £59,240 per year from my job and another £8,100 from a rental property. I don't use the rental income to live on (it is supporting my children and parents so don't count this in monthly 'salary'). At present my employer pays 23.68% into the scheme, I pay 10.2%. 

My first thought re the new scheme is, if I sacrifice £17,500 of my salary to put into my pension (pretty much 30%) do I avoid 40% tax on both the salary and rental earnings, and is this a good thing for my contributions? I appreciate there is an impact on potential finance applications but does it make a good option?

At the moment I can't work out what difference this sacrifice (less salary but also less tax and NI and minus current pension contributions) make to my actual monthly income.How might I find this and is this something my employer should be expected to provide?

Thanks.

Salary exchange only gives you (and your employer) an NI saving, not a saving on income tax (and from your question, I'm not certain you've grasped that point), so your ultimate tax position overall is unaltered by the use of salary sacrifice. 

I've had a quick look but couldn't immediately find an online calculator that gives you the option to input pension contributions for your current scheme, where personal contributions are deducted from your gross pay before it is taxed. Anyone able to help, please?

If you can't calculate the figures for yourself, then it's perfectly reasonable to ask if the employer can do so - although they don't have to. 

Your employer will, of course, provide the information on your payslip once the new arrangement is in place. 

Cleagarr

Marcon said:

Cleagarr said:

Morning,

I've already posted elsewhere over the past 9 months about pension changes at my work (private school moving away from the TPS to a DC scheme). 

We are now being told that the school will be looking at a Salary Exchange scheme through Royal London. My understanding is that this is the most tax efficient way of saving into a DC scheme but my questions revolve around the 40% tax bracket and what the exchange does to my monthly income.

I currently earn £59,240 per year from my job and another £8,100 from a rental property. I don't use the rental income to live on (it is supporting my children and parents so don't count this in monthly 'salary'). At present my employer pays 23.68% into the scheme, I pay 10.2%. 

My first thought re the new scheme is, if I sacrifice £17,500 of my salary to put into my pension (pretty much 30%) do I avoid 40% tax on both the salary and rental earnings, and is this a good thing for my contributions? I appreciate there is an impact on potential finance applications but does it make a good option?

At the moment I can't work out what difference this sacrifice (less salary but also less tax and NI and minus current pension contributions) make to my actual monthly income.How might I find this and is this something my employer should be expected to provide?

Thanks.

Salary exchange only gives you (and your employer) an NI saving, not a saving on income tax (and from your question, I'm not certain you've grasped that point), so your ultimate tax position overall is unaltered by the use of salary sacrifice. 

I've had a quick look but couldn't immediately find an online calculator that gives you the option to input pension contributions for your current scheme, where personal contributions are deducted from your gross pay before it is taxed. Anyone able to help, please?

If you can't calculate the figures for yourself, then it's perfectly reasonable to ask if the employer can do so - although they don't have to. 

Your employer will, of course, provide the information on your payslip once the new arrangement is in place. 

Thank you. So, if I sacrifice all earnings from my salary that mean my total income is under £50,000 I don't benefit tax-wise? You're right I don't understand it.

Marcon

Cleagarr said:

Marcon said:

Cleagarr said:

Morning,

I've already posted elsewhere over the past 9 months about pension changes at my work (private school moving away from the TPS to a DC scheme). 

We are now being told that the school will be looking at a Salary Exchange scheme through Royal London. My understanding is that this is the most tax efficient way of saving into a DC scheme but my questions revolve around the 40% tax bracket and what the exchange does to my monthly income.

I currently earn £59,240 per year from my job and another £8,100 from a rental property. I don't use the rental income to live on (it is supporting my children and parents so don't count this in monthly 'salary'). At present my employer pays 23.68% into the scheme, I pay 10.2%. 

My first thought re the new scheme is, if I sacrifice £17,500 of my salary to put into my pension (pretty much 30%) do I avoid 40% tax on both the salary and rental earnings, and is this a good thing for my contributions? I appreciate there is an impact on potential finance applications but does it make a good option?

At the moment I can't work out what difference this sacrifice (less salary but also less tax and NI and minus current pension contributions) make to my actual monthly income.How might I find this and is this something my employer should be expected to provide?

Thanks.

Salary exchange only gives you (and your employer) an NI saving, not a saving on income tax (and from your question, I'm not certain you've grasped that point), so your ultimate tax position overall is unaltered by the use of salary sacrifice. 

I've had a quick look but couldn't immediately find an online calculator that gives you the option to input pension contributions for your current scheme, where personal contributions are deducted from your gross pay before it is taxed. Anyone able to help, please?

If you can't calculate the figures for yourself, then it's perfectly reasonable to ask if the employer can do so - although they don't have to. 

Your employer will, of course, provide the information on your payslip once the new arrangement is in place. 

Thank you. So, if I sacrifice all earnings from my salary that mean my total income is under £50,000 I don't benefit tax-wise? You're right I don't understand it.

It's not salary sacrifice per se that gets you out of a higher rate tax band - it's the fact you are (effectively) increasing your pension contributions from just over £6,000 a year to £17,500 a year - a huge difference.

squirrelpie

Marcon is pointing out the difference between salary sacrifice and other methods of making pension contributions, but the original question also involved increasing your pension contribution as well. Increasing your pension contribution does reduce the amount of tax you pay, whatever method you use to make the contribution.

Sacrificing £17500 will bring your total income below the higher rate threshold so you'll be taxed at basic rate on everything above your personal allowance. You'll be noticeably increasing your contribution, which will benefit your pension. You'll be reducing your total income after tax (pay + rental) to around £30,000 (I haven't worked out changes due to NI) and need to consider whether that will be adequate.

Marcon

I wonder if this helps. You know what your current monthly take home pay is, so no need for anyone here to 'calculate' that.

Assuming you have the standard tax code of 1257L, you will get tax free pay each month of £12,570/12 = £1,047.50.

Your post-salary sacrifice pay will be £59,240 - £17,500 = £41,740, or £3,478.33 a month.

Taxable pay for a month will therefore be £3,478.33 - £1,047.50 = £2,430.83. Tax payable at 20% is £486.17.

Employee NI on gross salary of £3,478.33 is 8% of earnings above £1,048, so (£3,478.33-£1,048) x 0.08 = £194.43

So pay will be:
Gross pay for month £3,478.33
Minus:tax £486.17 and NI £194.43
Take home pay £2,797.73

Could be some very minor rounding errors in the above, so may be out by a few pence.

There will be an adjustment in the month you change from your current salary to the salary sacrifice arrangement (that's how PAYE works) and you'll get a tax refund for that month only, because your previous tax deductions will have been based on the assumption that you'd earn £59,240 for the whole 12 months (albeit with pension contributions of 10.2% deducted before tax, because that's how the TPS operates).

The amount going into your new DC pension will be £17,500 + whatever your employer contributes. Employer contributions are always paid gross, so there is no tax relief to add to the pension pot. The employer gets corporation tax relief on their contribution and the amount they've paid in respect of your salary sacrifice; and because the amount you've sacrificed never goes through payroll, and isn't classed as a taxable benefit, you are effectively getting 'tax relief' (you might need to ponder that for a few moments - it's often a bit of a leap of faith for people).


Add in your rental income to your post-sacrifice salary, and you get £49,840 - below the £50,271 at which higher rate tax becomes payable.

Cleagarr

Thanks to all for your thoughts, especially Marcon. Having looked at the figures it is unlikely I can sacrifice enough salary to avoid the 40% and afford to live... I think the sweetspot might be sacrificing around to £8k and putting this into my pension with the additional 15% contribution from my employer - this will build the pot I'm looking for alongside my existing teacher's pension (for info, I used the Which calculator to work this out and the HMRC tax calculator to work out probable take-home pay). 

There is talk of a pensions 'dashboard' which I hope will be able to model some of this before we actually sign up.

Thanks again.

Marcon

Cleagarr said:

Thanks to all for your thoughts, especially Marcon. Having looked at the figures it is unlikely I can sacrifice enough salary to avoid the 40% and afford to live... I think the sweetspot might be sacrificing around to £8k and putting this into my pension with the additional 15% contribution from my employer - this will build the pot I'm looking for alongside my existing teacher's pension (for info, I used the Which calculator to work this out and the HMRC tax calculator to work out probable take-home pay). 

There is talk of a pensions 'dashboard' which I hope will be able to model some of this before we actually sign up.

Thanks again.

I'm afraid the pensions dashboard is still several years away - and it isn't a modeller. The intention is that it will show people all their pension entitlements in one place.