Pension Salary Sacrifice and Higher Tax rate

Cobbler_tone

Marcon said:

Cobbler_tone said:

The most useful way to understand this is to look at your last payslip of the tax year and view 'taxable pay'.

This will take into account all of your salary, your bonus, any other taxable benefits/sacrifices and the amount you have been taxed on across the year. If you want to avoid 40% tax this is the number you need to get below the threshold, which can normally be achieved by juggling your pension contribution.
The challenge I have with mine is that my bonus is only known two weeks before the the end of the tax year and paid on the 31st March. The bonus can be anything from £0 - £9k and very difficult to have an exact idea of what it'll be (a national scheme), so a bit of a finger in the air....and they won't bonus sacrifice.

By the time you have your last payslip of the tax year, it's definitely too late to do anything via your employer/salary - so only useful as an aid to planning in the next tax year, but of course the numbers may well change...

Definitely, hence why my bonus messes me up sometimes in my planning.

I think it is a good way for people to understand how their taxable income is calculated. Once you can understand a pay slip you can normally understand how work placed pension contributions work, along with other taxable benefits such as healthcare etc.

prowla

Albermarle said:

prowla said:

As per others, you don't pay tax (and NI) on salary sacrifice, therefore there's nothing to reclaim.

ie.

• One year I was on £53k + £4k bonus = £57k
• This year I am on £52.5k + £5k bonus = £57.5k

Salary sacrifice is a tax avoidance scheme.

(Actually the resultant income when you draw the pension is taxable.)

There is no difference in the pension tax relief you gain when your employer uses a salary sacrifice scheme for pension contributions, compared to the other two methods ( Relief at source and Net pay) .
What you do gain is paying less NI. 

You avoid paying the tax, for example by keeping below a tax threshold.

Albermarle

prowla said:

Albermarle said:

prowla said:

As per others, you don't pay tax (and NI) on salary sacrifice, therefore there's nothing to reclaim.

ie.

• One year I was on £53k + £4k bonus = £57k
• This year I am on £52.5k + £5k bonus = £57.5k

Salary sacrifice is a tax avoidance scheme.

(Actually the resultant income when you draw the pension is taxable.)

There is no difference in the pension tax relief you gain when your employer uses a salary sacrifice scheme for pension contributions, compared to the other two methods ( Relief at source and Net pay) .
What you do gain is paying less NI. 

You avoid paying the tax, for example by keeping below a tax threshold.

But you also avoid paying the tax whichever system the employer uses, whether salary sacrifice or one of the other ways;
Net Pay - You get the full salary but your contributions are taken out before tax
Relief at source - Your contributions come from taxed pay, and the pension provider adds basic rate tax relief. Then you claim back higher rate tax relief.

The end result from a tax point of view is identical with all three systems.

LegoHead

El_Torro said:

This year for example your total compensation is not £62,750. It's £52.5k minus 10% (minus, not plus, as you have agreed to a lower salary in exchange for more pension contributions from your employer) plus £5k bonus. So £52,250. 

As others have mentioned you don't need to claim anything back from HMRC as PAYE should have handled it all for you, including taking into account the salary sacrifice.

The important thing to remember is that salary sacrifice is a much better way to pay into a pension than making the contributions yourself. If you make the contributions yourself you can still claim Income Tax relief but you don't get the benefit of paying less National Insurance.

No my pension is 10% on top of my salary. I pay 5% of my salary through sacrifice out of the £52.5k. If I wanted I could take the 10% company pension contribution and add it to my salary but not doing this.

I do think I need to do some research to understand this. will read through rest of comments now. thanks for feedback.

LegoHead

Thankyou for all your comments everyone, it has helped me understand that indeed I missed the critical part that is the salary sacrifice. I have sacrificed most of my bonus this year and did as was mentioned earlier stuck a finger in the air and guessed how much bonus I could take without tipping over the higher rate threshold.

The reason I got started thinking about all this was there was something written on my bonus letter when they asked us if we wanted to sacrifice stating we had to talk to HMRC to get full relief on it. I have re-read the letter and now see they said if I was to not sacrifice the bonus but paid it direct to pension provider I would then have to talk to HMRC about getting the higher rate tax relief.

So I now agree with all your comments as I understand it a little better. Thanks for taking time to explain it!