Should I salary sacrifice?

patrickyuis

£95k salary with 10% Bonus. Which would take me over the £100k trap. 1 child but already in high school so no childcare required.

My employer basically offers the minimal in terms of pension benefits as far as I can see. 

3% default contribution

and also pass on zero contributions from NI if I choose to salary sacrifice.

At the moment I don't actually need the majority of my wages for my outgoings, I can sacrifice 50% and still live the same lifestyle. My pension is pretty low for my age though.

I just kind of want to work out a net benefit position if I choose to SS a large chunk of my salary. I've used the online salary sacrifice calculators and don't really understand the end results.

assuming I sacrifice 50% of my salary via Salary sacrifice (i would be at £47.5k salary) and stay out of even the 40% tax bracket, am I actually saving another 20% in tax? Because I know when I come to withdraw my pension anyways it will still be taxed at 20% on the way out but in regards to the this 'tax relief' that I get I dont understand that aspect.

If i do nothing, my year takehome is £64,336.50 (£2,201.50 contributed to pension)

If I sacrifice down to £47,500 my takehome is £37,719.60 :

Difference in takehome is £26,616.90

But my pension contribution then becomes :

£47,500 + £11,900 (basic rate tax relief top up) = £59,500

and I can also claim back £8,946 from HMRC in the form of higher rate tax relief

so in essence Im only giving up £26,616.90 in take-home pay to have a pension benefit of what adds up to £68,446?

Have i understood this correctly? any advice appreciated, Thanks.

TheSpectator

patrickyuis said:

£95k salary with 10% Bonus. Which would take me over the £100k trap. 1 child but already in high school so no childcare required.

My employer basically offers the minimal in terms of pension benefits as far as I can see. 

3% default contribution

and also pass on zero contributions from NI if I choose to salary sacrifice.

At the moment I don't actually need the majority of my wages for my outgoings, I can sacrifice 50% and still live the same lifestyle. My pension is pretty low for my age though.

I just kind of want to work out a net benefit position if I choose to SS a large chunk of my salary. I've used the online salary sacrifice calculators and don't really understand the end results.

assuming I sacrifice 50% of my salary via Salary sacrifice (i would be at £47.5k salary) and stay out of even the 40% tax bracket, am I actually saving another 20% in tax? Because I know when I come to withdraw my pension anyways it will still be taxed at 20% on the way out but in regards to the this 'tax relief' that I get I dont understand that aspect.

If i do nothing, my year takehome is £64,336.50 (£2,201.50 contributed to pension)

If I sacrifice down to £47,500 my takehome is £37,719.60 :

Difference in takehome is £26,616.90

But my pension contribution then becomes :

£47,500 + £11,900 (basic rate tax relief top up) = £59,500

and I can also claim back £8,946 from HMRC in the form of higher rate tax relief

so in essence Im only giving up £26,616.90 in take-home pay to have a pension benefit of what adds up to £68,446?

Have i understood this correctly? any advice appreciated, Thanks.

You have vastly misunderstood salary sacrifice. You do not get basic rate relief on top of what you have sacrificed, not further higher rate relief.

The tax saving is that you do not pay and tax (or NIC) on the sacrificed amount that you otherwise would have had you not sacrificed it.

Cobbler_tone

As above, you are already getting the relief via SS. i.e. as a 40% tax payer, you put £100 in your pension and it costs you £60 (due to not getting the tax withheld) plus the bit of NI saving.
Sometimes the employer will also contribute more linked to employee contribution, usually up to a maximum.

It'd be nice if you could claim it twice! 

400ixl

You sound like a prime candidate for Salary Sacrifice if you have income you do not need and are behind the curve on creating a pension to support you in the future.

Essentially SS means that all contributions are employer contributions and therefore taken before any tax is incurred by you. You take what they are already paying and then add the percentage you want to contribute and add them together, that is pretty much it as to the value going into the pension, no need to think about contributing rate of income tax or NI as they don't exist for this scenario.

Two considerations, you can't SS to a point that your taxable income goes below minimum wage, but that is not an issue in your example). You also can't contribute (your + employer) more than £60k unless a) you have not used all of your allowance in the previous 3 years and b) your income has to be at least as much as your employer contribution (total including your SS element).

Pretty straight forward in your case if your + company contribution is £59,500 as it is below the allowance of £60k and lower than your salary.

Marcon

400ixl said:

You sound like a prime candidate for Salary Sacrifice if you have income you do not need and are behind the curve on creating a pension to support you in the future.

Essentially SS means that all contributions are employer contributions and therefore taken before any tax is incurred by you. You take what they are already paying and then add the percentage you want to contribute and add them together, that is pretty much it as to the value going into the pension, no need to think about contributing rate of income tax or NI as they don't exist for this scenario.

Two considerations, you can't SS to a point that your taxable income goes below minimum wage, but that is not an issue in your example). You also can't contribute (your + employer) more than £60k unless a) you have not used all of your allowance in the previous 3 years and b) your income has to be at least as much as your contribution.

Pretty straight forward in your case if your + company contribution is £59,500 as it is below the allowance of £60k and lower than your salary.

That's true for personal contributions - but as you've already mentioned earlier in your post, contributions paid by salary sacrifice are employer contributions. See top of page 2: https://www.ajbell.co.uk/sites/default/files/useful-forms/AJBYI_SIPP_carry_forward_guide.pdf

patrickyuis

TheSpectator said:

patrickyuis said:

£95k salary with 10% Bonus. Which would take me over the £100k trap. 1 child but already in high school so no childcare required.

My employer basically offers the minimal in terms of pension benefits as far as I can see. 

3% default contribution

and also pass on zero contributions from NI if I choose to salary sacrifice.

At the moment I don't actually need the majority of my wages for my outgoings, I can sacrifice 50% and still live the same lifestyle. My pension is pretty low for my age though.

I just kind of want to work out a net benefit position if I choose to SS a large chunk of my salary. I've used the online salary sacrifice calculators and don't really understand the end results.

assuming I sacrifice 50% of my salary via Salary sacrifice (i would be at £47.5k salary) and stay out of even the 40% tax bracket, am I actually saving another 20% in tax? Because I know when I come to withdraw my pension anyways it will still be taxed at 20% on the way out but in regards to the this 'tax relief' that I get I dont understand that aspect.

If i do nothing, my year takehome is £64,336.50 (£2,201.50 contributed to pension)

If I sacrifice down to £47,500 my takehome is £37,719.60 :

Difference in takehome is £26,616.90

But my pension contribution then becomes :

£47,500 + £11,900 (basic rate tax relief top up) = £59,500

and I can also claim back £8,946 from HMRC in the form of higher rate tax relief

so in essence Im only giving up £26,616.90 in take-home pay to have a pension benefit of what adds up to £68,446?

Have i understood this correctly? any advice appreciated, Thanks.

You have vastly misunderstood salary sacrifice. You do not get basic rate relief on top of what you have sacrificed, not further higher rate relief.

The tax saving is that you do not pay and tax (or NIC) on the sacrificed amount that you otherwise would have had you not sacrificed it.

righttttt so i've basically double calculated then. sorry I put these calculations into one of those online calculators as

income £95,000

you pay £45,600 the gov adds 20% (£11,400)

As a 40% higher rate taxpayer you can claim back up to an extra £8,946. Your pension contribution could effectively cost you as little as £36,654.

So the correct calculation would roughly be that I am giving up £36,654 to get £57,000 in total pension benefits, but accouting for the fact that when you withdraw anyways you'll be paying that 20% back lol

Dazed_and_C0nfused

patrickyuis said:

TheSpectator said:

patrickyuis said:

£95k salary with 10% Bonus. Which would take me over the £100k trap. 1 child but already in high school so no childcare required.

My employer basically offers the minimal in terms of pension benefits as far as I can see. 

3% default contribution

and also pass on zero contributions from NI if I choose to salary sacrifice.

At the moment I don't actually need the majority of my wages for my outgoings, I can sacrifice 50% and still live the same lifestyle. My pension is pretty low for my age though.

I just kind of want to work out a net benefit position if I choose to SS a large chunk of my salary. I've used the online salary sacrifice calculators and don't really understand the end results.

assuming I sacrifice 50% of my salary via Salary sacrifice (i would be at £47.5k salary) and stay out of even the 40% tax bracket, am I actually saving another 20% in tax? Because I know when I come to withdraw my pension anyways it will still be taxed at 20% on the way out but in regards to the this 'tax relief' that I get I dont understand that aspect.

If i do nothing, my year takehome is £64,336.50 (£2,201.50 contributed to pension)

If I sacrifice down to £47,500 my takehome is £37,719.60 :

Difference in takehome is £26,616.90

But my pension contribution then becomes :

£47,500 + £11,900 (basic rate tax relief top up) = £59,500

and I can also claim back £8,946 from HMRC in the form of higher rate tax relief

so in essence Im only giving up £26,616.90 in take-home pay to have a pension benefit of what adds up to £68,446?

Have i understood this correctly? any advice appreciated, Thanks.

You have vastly misunderstood salary sacrifice. You do not get basic rate relief on top of what you have sacrificed, not further higher rate relief.

The tax saving is that you do not pay and tax (or NIC) on the sacrificed amount that you otherwise would have had you not sacrificed it.

righttttt so i've basically double calculated then. sorry I put these calculations into one of those online calculators as

income £95,000

you pay £45,600 the gov adds 20% (£11,400)

As a 40% higher rate taxpayer you can claim back up to an extra £8,946. Your pension contribution could effectively cost you as little as £36,654.

So the correct calculation would roughly be that I am giving up £36,654 to get £57,000 in total pension benefits, but accouting for the fact that when you withdraw anyways you'll be paying that 20% back lol

Nope.

25% can be taken as a tax free lump sum (subject to overall TFLS limit of ~£268k).

The remaining 75% is taxable income when taken out of the pension.  You might pay 20% tax on that.  Or none.  Or 48% if you're a Scottish top rate payer.  It is just another source of taxable income which is taken into account when calculating your tax liability.

And if you actually giving up say £40k then that is what goes into your pension.  As an employer contribution.  There is no pension tax relief due to on an employer contribution and nothing for you to contact HMRC about.

But as you have £40k less salary you avoid paying tax and NI on that £40k.  So the real cost in lost take home pay is far less than £40k.

patrickyuis

400ixl said:

You sound like a prime candidate for Salary Sacrifice if you have income you do not need and are behind the curve on creating a pension to support you in the future.

Essentially SS means that all contributions are employer contributions and therefore taken before any tax is incurred by you. You take what they are already paying and then add the percentage you want to contribute and add them together, that is pretty much it as to the value going into the pension, no need to think about contributing rate of income tax or NI as they don't exist for this scenario.

Two considerations, you can't SS to a point that your taxable income goes below minimum wage, but that is not an issue in your example). You also can't contribute (your + employer) more than £60k unless a) you have not used all of your allowance in the previous 3 years and b) your income has to be at least as much as your contribution.

Pretty straight forward in your case if your + company contribution is £59,500 as it is below the allowance of £60k and lower than your salary.

ahhhhhh ok thank you this makes more sense to me now.

in the A&B scenario I understand A but B, does that mean you cannot sacrifice more than 50%? because if you sacrifice 51% then your contribution would obviously be higher than your salary. But I noticed you mentioned 'income' so I'm assuming that mean income as a whole which includes anything outside of your salary?

I thought you could sacrifice as much as you want as long as it doesnt exceed £60k a year or that it doesnt bring your total income for that year to below the national living wage, which is like £22k? (not 100% sure on that)

just thought I would check with you incase at some point I would like to do more than 50%. Thanks

Dazed_and_C0nfused

patrickyuis said:

400ixl said:

You sound like a prime candidate for Salary Sacrifice if you have income you do not need and are behind the curve on creating a pension to support you in the future.

Essentially SS means that all contributions are employer contributions and therefore taken before any tax is incurred by you. You take what they are already paying and then add the percentage you want to contribute and add them together, that is pretty much it as to the value going into the pension, no need to think about contributing rate of income tax or NI as they don't exist for this scenario.

Two considerations, you can't SS to a point that your taxable income goes below minimum wage, but that is not an issue in your example). You also can't contribute (your + employer) more than £60k unless a) you have not used all of your allowance in the previous 3 years and b) your income has to be at least as much as your contribution.

Pretty straight forward in your case if your + company contribution is £59,500 as it is below the allowance of £60k and lower than your salary.

ahhhhhh ok thank you this makes more sense to me now.

in the A&B scenario I understand A but B, does that mean you cannot sacrifice more than 50%? because if you sacrifice 51% then your contribution would obviously be higher than your salary. But I noticed you mentioned 'income' so I'm assuming that mean income as a whole which includes anything outside of your salary?

I thought you could sacrifice as much as you want as long as it doesnt exceed £60k a year or that it doesnt bring your total income for that year to below the national living wage, which is like £22k? (not 100% sure on that)

just thought I would check with you incase at some point I would like to do more than 50%. Thanks

If you use salary sacrifice you aren't paying anything into the pension.

You would have say £47k taxable salary and have contributed precisely £0 for tax relief purposes.

For annual allowance purposes you would contributed precisely £0 but your employer would have contributed say £50k (whatever you sacrificed) plus their own normal contributions.

patrickyuis

Dazed_and_C0nfused said:

Nope.

25% can be taken as a tax free lump sum (subject to overall TFLS limit of ~£268k).

The remaining 75% is taxable income when taken out of the pension.  You might pay 20% tax on that.  Or none.  Or 48% if you're a Scottish top rate payer.  It is just another source of taxable income which is taken into account when calculating your tax liability.

And if you actually giving up say £40k then that is what goes into your pension.  As an employer contribution.  There is no pension tax relief due to on an employer contribution and nothing for you to contact HMRC about.

But as you have £40k less salary you avoid paying tax and NI on that £40k.  So the real cost in lost take home pay is far less than £40k.

righttttt, no I understand this now. when you say 'employer' contribution it made sense cause I think I kept thinking differently as if it was my contribution.

also saves the whole HMRC contacting situation aswell.

Making alot more sense now, thank you

ali_bear

patrickyuis said:

I thought you could sacrifice as much as you want as long as it doesnt exceed £60k a year or that it doesnt bring your total income for that year to below the national living wage, which is like £22k? (not 100% sure on that)

just thought I w
ould check with you incase at some point I would like to do more than 50%. Thanks

Yes that is correct. You can also carry forward that MPAA from 3 previous years. 

This is what I did - set the salsac amount to bring my taxable salary down to about 50k i.e. just under the 40% band. Let the pension gobble up the extra.