Claiming State Pension and Salary Sacrifice

Deverell2

I will be 66 this year and able to claim the state Pension. However, I am in full time employment paying tax at 40% band and intend to continue working for the next 2 years. The options seem to be claim the State pension or defer for the 2 years. I was thinking of claiming the State pension and increasing payments into my company pension by the equivalent amount of the monthy State pension as a salary sacrifice. On the surface it feels it's the best as the increase in my company pension will be far greater than the extra state pension due from deferring it. And It would boost my private pension and would be tax efficient until I fully retire at 68

Before going off to a financial adviser, I wondered if any one had a thought or made similar decision. Am aware our circumstances may be different, but it comes down to just 2 choices, salary sacrifice on the pension payment or defer the State Pension. Either way, would that affect my net pay...

Thanks

jaypers

Not done it but your logic is sound. 

On the tax side of things, state pension is paid tax free and as such your tax code will be adjusted accordingly against your employee tax code, so you’ll be effectively paying more tax to compensate. 

IanManc

jaypers said:

Not done it but your logic is sound. 

On the tax side of things, state pension is paid tax free and as such your tax code will be adjusted accordingly against your employee tax code, so you’ll be effectively paying more tax to compensate. 

I understand what you mean. but to assist anyone reading this in future who might misunderstand it, the state pension is paid without deduction of tax but is taxable. It isn't "paid tax free".

zagfles

How do you work out that "the increase in my company pension will be far greater than the extra state pension due from deferring it."? 

Tax wise it's probably fairly neutral. The state pension is extra taxable income which you offset by increasing your sal sac. The extra pension you get later, whether from extra state pension or extra company pension, is likely to be taxed at the same rate. Although you'll potentially get more tax free cash through having a bigger company pension

And as you stop paying NI at state pension age, there's no NI saving from sal sac (unless your employer shares their saving with you). 

happybagger

Is NI deducted once someone reaches state pension age?

zagfles

happybagger said:

Is NI deducted once someone reaches state pension age?

No! Good spot, I'll edit my post. 

badmemory

I thought you stopped paying NI at state pension age or is it different if you have to file self assessment.  Also the extra tax at 40% of £220ish is £88 a week.  Defer for 2 years makes the weekly amount over £240 (plus any increases).  Then tax if only due at 20% would be significantly lower.

prowla

There is a tax saving if you subsequently take out the 20% tax-free lump sum from the pension.

zagfles

badmemory said:

I thought you stopped paying NI at state pension age or is it different if you have to file self assessment.  Also the extra tax at 40% of £220ish is £88 a week.  Defer for 2 years makes the weekly amount over £240 (plus any increases).  Then tax if only due at 20% would be significantly lower.

Forget NI, that was my mistake, I've editted by post.

Tax while working is neutral, OP is talking about sal sac'ing the equivalent of the state pension if he/she defers it, so taxable income now will be exactly the same in both cases so tax will be exactly the same.

Then when the extra income is drawn, whether extra state pension or extra company pension it'll be taxed then so likely to be the same apart from the extra TFLS from the company pension. So the sal sac method likely to have an edge tax wise, but state pension deferral may get more (or it may not, depending how the company pension performs). 

jaypers

IanManc said:

jaypers said:

Not done it but your logic is sound. 

On the tax side of things, state pension is paid tax free and as such your tax code will be adjusted accordingly against your employee tax code, so you’ll be effectively paying more tax to compensate. 

I understand what you mean. but to assist anyone reading this in future who might misunderstand it, the state pension is paid without deduction of tax but is taxable. It isn't "paid tax free".

That was really bad wording on my part…..thanks for pointing this out. I knew what I meant too!

zagfles

prowla said:

There is a tax saving if you subsequently take out the 20% tax-free lump sum from the pension.

OMG I'm having a bad day today! I'll edit again.