Salary sacrifice and staying above National Minimum Wage

singhini

Ive just spent the last 2 hours catching up with posts on this forum regarding cutting tax which has confused me.
In peoples attempts to reduce their taxable income to lower their tax position, people look to "salary sacrifice" as a method of achieving this. Which makes sense! 

However, I've read comments that suggest people still need to remember that any salary sacrifice should NOT mean they earn less than minimum wage (£11.44 for most adults).

So, having done a quick internet search on "how many hours in a working year" the internet suggests somewhere between 1,820 - 2080 hours a year,

So if we say 1,820 x £11.44 = £20,821

Does that mean if someone's salary is £27,000 they can only salary sacrifice £6,179 

That can't be right. I'm sure here isn't a specific limit to how much employees are allowed to sacrifice each year, so someone earning £27,000 could salary sacrifice £14,500 meaning their taxable income is £12,500 i.e. below the personal allowance and thus no tax to pay!

Can someone explain please. 

Dazed_and_C0nfused

singhini said:

Ive just spent the last 2 hours catching up with posts on this forum regarding cutting tax which has confused me.
In peoples attempts to reduce their taxable income to lower their tax position, people look to "salary sacrifice" as a method of achieving this. Which makes sense! 

However, I've read comments that suggest people still need to remember that any salary sacrifice should NOT mean they earn less than minimum wage (£11.44 for most adults).

So, having done a quick internet search on "how many hours in a working year" the internet suggests somewhere between 1,820 - 2080 hours a year,

So if we say 1,820 x £11.44 = £20,821

Does that mean if someone's salary is £27,000 they can only salary sacrifice £6,179 

That can't be right. I'm sure here isn't a specific limit to how much employees are allowed to sacrifice each year, so someone earning £27,000 could salary sacrifice £14,500 meaning their taxable income is £12,500 i.e. below the personal allowance and thus no tax to pay!

Can someone explain please. 

You are conflating two things.

Salary sacrifice is an agreement where you agree to a reduced salary in return for your employer contributing more to your pension. 

Employers must comply with NMW legislation which is why you cannot sacrifice to below this.

Separately you have two limits for pension contribution purposes. 

The annual allowance, currently £60k, which is relevant for the total of all contributions (including employer contributions) which can be paid in a tax year.

And the tax relief limit.  Which is constrained by your earnings for pension contribution purposes.  Or £3,600 if you have no earnings or they are less than £3,600.

Plenty of people posting on here (or the pensions board) sacrifice down to NMW and then make personal RAS contributions.

And don't forget salary sacrifice may well not be the optimum method for low earners where there would be no tax or NI avoidance.

kimwp

singhini said:

Ive just spent the last 2 hours catching up with posts on this forum regarding cutting tax which has confused me.
In peoples attempts to reduce their taxable income to lower their tax position, people look to "salary sacrifice" as a method of achieving this. Which makes sense! 

However, I've read comments that suggest people still need to remember that any salary sacrifice should NOT mean they earn less than minimum wage (£11.44 for most adults).

So, having done a quick internet search on "how many hours in a working year" the internet suggests somewhere between 1,820 - 2080 hours a year,

So if we say 1,820 x £11.44 = £20,821

Does that mean if someone's salary is £27,000 they can only salary sacrifice £6,179 

That can't be right. I'm sure here isn't a specific limit to how much employees are allowed to sacrifice each year, so someone earning £27,000 could salary sacrifice £14,500 meaning their taxable income is £12,500 i.e. below the personal allowance and thus no tax to pay!

Can someone explain please. 

What makes you sure there is no limit?

But yes, someone over 21 can't reduce their salary to below £11.44 an hour. The annual amount will depend on how many hours that person works (and it becomes a bit complicated with overtime pay if that's a multiplier of their "normal" rate), but fundamentally someone can't be paid less than the minimum wage - £20,821 for someone working 1820 hours, as you calculated.

singhini

How did you get the figure £2821 ?

Dazed_and_C0nfused

singhini said:

How did you get the figure £2821 ?

There is a 0 missing!

kimwp

Edited, thought it looked a bit short.

saajan_12

singhini said:

That can't be right. I'm sure here isn't a specific limit to how much employees are allowed to sacrifice each year, so someone earning £27,000 could salary sacrifice £14,500 meaning their taxable income is £12,500 i.e. below the personal allowance and thus no tax to pay!

Why are you 'sure' there isn't a limit? There indeed is an implicit limit arising from the other rules you mention (ie NMW)

Sarahspangles

An employer can’t salary sacrifice so they’re paying less than National Minimum Wage as NMW can be enforced.

And if they somehow found a way to do it, meaning you didn’t earn enough to pay NI contributions, you’d potentially lose out on State Pension.

Dazed_and_C0nfused

Sarahspangles said:

An employer can’t salary sacrifice so they’re paying less than National Minimum Wage as NMW can be enforced.

And if they somehow found a way to do it, meaning you didn’t earn enough to pay NI contributions, you’d potentially lose out on State Pension.

You don't need to pay NI to get a qualifying year though, you need to earn £123/week (the lower earnings limit) for a week to count.  Which is well under the limit for paying NI.

Sarahspangles

Dazed_and_C0nfused said:

Sarahspangles said:

An employer can’t salary sacrifice so they’re paying less than National Minimum Wage as NMW can be enforced.

And if they somehow found a way to do it, meaning you didn’t earn enough to pay NI contributions, you’d potentially lose out on State Pension.

You don't need to pay NI to get a qualifying year though, you need to earn £123/week (the lower earnings limit) for a week to count.  Which is well under the limit for paying NI.

If your employer has allowed you to salsac all of your income, how does HMRC know you earned £123/week?

Dazed_and_C0nfused

Sarahspangles said:

Dazed_and_C0nfused said:

Sarahspangles said:

An employer can’t salary sacrifice so they’re paying less than National Minimum Wage as NMW can be enforced.

And if they somehow found a way to do it, meaning you didn’t earn enough to pay NI contributions, you’d potentially lose out on State Pension.

You don't need to pay NI to get a qualifying year though, you need to earn £123/week (the lower earnings limit) for a week to count.  Which is well under the limit for paying NI.

If your employer has allowed you to salsac all of your income, how does HMRC know you earned £123/week?

From the Real Time Information (RTI) reports the employer has to file with HMRC.