Explanation in 'Which' of salary sacrifice for pensions

Albermarle

No wonder people get confused.

The comparison below assumes that the personal allowance has already been used, and looks at what income tax you'd pay with and without salary sacrifice:

Without salary sacrifice

1. Your total salary remains unchanged at £25,000.
2. The basic rate of income tax is 20% - so that leaves you with £20,000.
3. You then pay 5% (£1,000) of your salary into a private pension. That reduces your annual earnings to £19,000.
4. However, you receive tax relief of 20% on 5% of your pay before tax, so that's an extra £250 added to your own contribution. There's now a total of £1,250 in pension contributions.
5. Finally your employer puts in 3%, leaving you with a total of £2,000 in pension contributions.

With salary sacrifice

1. First, the employer cuts your pre-tax salary by £1,000, bringing the total to £24,000.
2. Once you have taken away the basic rate of income tax (20%), you're left with £19,200.
3. The employee then puts in 5% of their remaining salary into pension contributions - in this case £960.
4. Because there's 20% tax relief on the 5% pension contribution, you can add £240 to the total pension contributions. That brings the total pension contributions to £1,200.
5. Now let's add the 3% employer contribution plus the £1,000 salary sacrifice. That brings the overall total pension contributions to £2,920.

hugheskevi

I'm completely confused - article linked here for convenience.

The 'without salary sacrifice' was bad enough - no Personal Alowance, I wonder how many schemes permit specification of a contribution amount of 5% contribution of earnings after income tax but before National Insurance, excluding the basic rate relief applied by the pension provider

Happily moves between net and gross contributions, ignores net pay contributions, ignores National Insurance, ignores schemes that would implement a 5% member contribution rate under RAS as a 4% deduction from net salary (I'd say from net pay, but that would get horribly confusing).

Then you get onto the main course of the Dog's Breakfast...I sal sac £1,000, then also put in 5% of my residual earnings via RAS. My employer adds 3% based on my post-sacrifice salary (not my reference salary...), and somehow this is equivalent to the previous RAS example, despite me now contributing 5%+5% via RAS and sal sac compared to just 5% from RAS.

It is bad enough that someone wrote this, but someone also cleared it for publication

mark_cycling00

That example has left me totally confused. 

I reckon the journalist has obtained it from somewhere or someone and just added it verbatim. Job done. Now back to testing midrange air fryers 

Albermarle

IvanOpinion said:

I am surprised at Which making such a pigs-ear out of stuff explained much better elsewhere.

I have seen posts on here in the past, that some of their other explantations of personal finance issues are also riddled with inaccuracies .

Beddie

Which? should stick to testing washing machines.

Grumpy_chap

That example appears to have used the worst possible salary as the start point for the £1k ss to be applied against as it could bring some to the point where SS is constrained by NMW.

Universidad

Grumpy_chap said:

That example appears to have used the worst possible salary as the start point for the £1k ss to be applied against as it could bring some to the point where SS is constrained by NMW.

It just keeps getting better!

uss_hamish

I smell ChatGPT or similar, I think.

Marcon

All well and good posting here, but has anyone actually complained direct to Which?

Albermarle

Marcon said:

All well and good posting here, but has anyone actually complained direct to Which?

I have now,

However in a past thread someone had written to them more than once about another howler, but it was never changed.

Albermarle

They replied asking for my member details, implying any query can only come from members.
I am not a Which subscriber, but I will still reply anyway, politely pointing out they are damaging their reputation by publishing such misleading info.