Salary sacrifice and annual income

zagfles

lucyandthomas said:

Employers base contribution is 6%, employees is 4%.

He wants to use the 12570 personal allowance for 26/27, and to get as much as possible into his pension in the time it takes to fully use his personal allowance. Doesn’t have to be the full 60k. I suppose the question is, how many months would he need to work to fully utilize his personal allowance, and how much could he get into his pension in that time? And how much longer would he have to work to fully utilise his personal allowance AND get 60k into his pension.

many thanks 

About 6 weeks for the former and just over 4 months for the latter. Assuming he's happy to pay all his taxable income into the pensions. 

To achieve the PA as quick as possible he'd not sal sac anything, so he needs 12570 taxable ASAP. So the fraction of a year is 12570/(97k*0.96+15k) = 0.116 = a bit over 6 weeks or a bit under a month and a half. Pension conts to the company scheme would then be 97k*(0.06+0.04)*0.116 = £1125 and he could also pay £10056 net into a SIPP so a gross cont of £12570, so total £13695

To get the full £60k into pensions he needs his taxable income plus employer conts inc sal sac to equal £60k. So assuming £20k is taken up by the bonus that leaves £40k. It doesn't matter how much he sal sacs as the total of employer conts and taxable income is known and will be salary plus base employer conts plus benefits. So the proportion of the year required is 40000/(97k*1.06+15k) = 0.3395 = 4.07 months. This assumes he then pays 80% of his taxable income into a SIPP, ie 100% gross, so that his total gross pension conts is his sal sac plus employer conts plus taxable income. 

If he wants to keep the PA rather than paying it into a pension then replace 40000 with (40000+12570) above, will be a bit over 5 months. Stuff like accrued holiday pay may come into the equation, and obviously possibility of payrises, change in benefit values etc so you'd need to account for them. And if employer shares NI savings that needs accounting for. 

lucyandthomas

Thank you so much for taking the time to reply. My head is spinning!

His employer does pass on the NI savings, so would this be included as part of the employer contribs?

And how does his employee contrib count? He has to make 4% contrib to get the 6% employer contrib? Are you including the employee contrib as part of the sal sac? 

What is the advantage of paying into his SIPP instead of salary sacrificing enough to reach the 60k, so total EE incl bonus + ER + NI = 60k. His employer is extremely flexible and he can change the amount he salary sacrifices as often as he likes.

Very confused. Thank you again for your help 

Dazed_and_C0nfused

lucyandthomas said:

Thank you so much for taking the time to reply. My head is spinning!

His employer does pass on the NI savings, so would this be included as part of the employer contribs?

And how does his employee contrib count? He has to make 4% contrib to get the 6% employer contrib? Are you including the employee contrib as part of the sal sac? 

What is the advantage of paying into his SIPP instead of salary sacrificing enough to reach the 60k, so total EE incl bonus + ER + NI = 60k. His employer is extremely flexible and he can change the amount he salary sacrifices as often as he likes.

Very confused. Thank you again for your help 

Salary sacrifice means he isn't contributing anything himself.

He is agreeing to a reduced salary in return for additional employer contributions.  That's why there is no tax relief added to his pension fund, none is due on employer contributions.

For annual allowance purposes (the £60k) all employer contributions are counted.  As are any contributions he makes plus any basic rate relief added to the pension when contributions he makes are made using the relief at source method.

lucyandthomas

Sorry, I didn’t word that very well.

So, he has to make at least a 4% sacrifice to get the 6% base employer contrib. He usually sacrifices more. Each month, his pension increases by his sal sac + 6% ER + NI saving, up  to 60k.

He doesn’t make any contributions via relief at source. All contributions have been made as employer contributions with salary sacrifice.

Zagfles mentions paying 80% of taxable income into his SIPP. What is the advantage of paying this into his SIPP, rather than sacrificing enough to get to 60k (all as employer contributions).

Thanks

zagfles

lucyandthomas said:

Sorry, I didn’t word that very well.

So, he has to make at least a 4% sacrifice to get the 6% base employer contrib. He usually sacrifices more. Each month, his pension increases by his sal sac + 6% ER + NI saving, up  to 60k.

He doesn’t make any contributions via relief at source. All contributions have been made as employer contributions with salary sacrifice.

Zagfles mentions paying 80% of taxable income into his SIPP. What is the advantage of paying this into his SIPP, rather than sacrificing enough to get to 60k (all as employer contributions).

Thanks

The advantage is he gets to the £60k quicker, because he can't sal sac all his income. So if he wants to sal sac the lot he'll have to work longer than if he sal sacs as much as possible and pays the rest into a SIPP.

If you assume a min wage of £26k (will depend on his hours and whatever they raise it by in 2026), his max sal sac will be £71k/year ie £5917 a month. Add employer conts of £485 and £887 NI saving if they pay it all in makes £7289 a month. So would take 5.5 months to get to £40k. 

Shimrod

lucyandthomas said:

Thanks for all your responses. 

Some more info, working April/May/June isn’t cast in stone. Could work for longer. Salary is £97k plus 15k car/fuel/healthcare. £500 savings interest. Potential bonus 20k - could be taken as salary in March 26 (and would be taxed at 40%) or added to pension in which case Aviva would view it as 26/27 contribution (arrives with Aviva mid April 26). 

You may already have considered this, but it's worth checking on the terms of the bonus payment before handing notice in. Many companies remove you from eligibility for the bonus scheme if you are under notice, so best to have the bonus paid before resigning.

lucyandthomas

Shimrod said:

lucyandthomas said:

Thanks for all your responses. 

Some more info, working April/May/June isn’t cast in stone. Could work for longer. Salary is £97k plus 15k car/fuel/healthcare. £500 savings interest. Potential bonus 20k - could be taken as salary in March 26 (and would be taxed at 40%) or added to pension in which case Aviva would view it as 26/27 contribution (arrives with Aviva mid April 26). 

You may already have considered this, but it's worth checking on the terms of the bonus payment before handing notice in. Many companies remove you from eligibility for the bonus scheme if you are under notice, so best to have the bonus paid before resigning.

Absolutely - thanks. 

lucyandthomas

zagfles said:

lucyandthomas said:

Sorry, I didn’t word that very well.

So, he has to make at least a 4% sacrifice to get the 6% base employer contrib. He usually sacrifices more. Each month, his pension increases by his sal sac + 6% ER + NI saving, up  to 60k.

He doesn’t make any contributions via relief at source. All contributions have been made as employer contributions with salary sacrifice.

Zagfles mentions paying 80% of taxable income into his SIPP. What is the advantage of paying this into his SIPP, rather than sacrificing enough to get to 60k (all as employer contributions).

Thanks

The advantage is he gets to the £60k quicker, because he can't sal sac all his income. So if he wants to sal sac the lot he'll have to work longer than if he sal sacs as much as possible and pays the rest into a SIPP.

If you assume a min wage of £26k (will depend on his hours and whatever they raise it by in 2026), his max sal sac will be £71k/year ie £5917 a month. Add employer conts of £485 and £887 NI saving if they pay it all in makes £7289 a month. So would take 5.5 months to get to £40k. 

Thank you so much for your help - finally, I get it! May well be back nearer the time to double check our numbers, but we’ve now got a much clearer idea of the calculations, and when he can jack it in 😀

Dazed_and_C0nfused

Shimrod said:

lucyandthomas said:

Thanks for all your responses. 

Some more info, working April/May/June isn’t cast in stone. Could work for longer. Salary is £97k plus 15k car/fuel/healthcare. £500 savings interest. Potential bonus 20k - could be taken as salary in March 26 (and would be taxed at 40%) or added to pension in which case Aviva would view it as 26/27 contribution (arrives with Aviva mid April 26). 

You may already have considered this, but it's worth checking on the terms of the bonus payment before handing notice in. Many companies remove you from eligibility for the bonus scheme if you are under notice, so best to have the bonus paid before resigning.

A regular theme on the Employment board is posts from people who have decided to leave an employer and discover a bonus they were expecting is no longer going to be paid.

Invariably it turns out the bonus was discretionary.

lucyandthomas

Thanks. Bonus is paid end of March, notice period is 3 months, so if he’s looking at 4-5 months of work in 26/27 tax year before retirement, this works out ok. He’ll have received his bonus for 2025 in March 2026 before his notice goes in, and he won’t be eligible for the 2026 bonus as he won’t work the full year.