Can someone please explain what the 2K threshold and NI contributions change means

Mistermeaner

Salary sacrifice as much as you can (caveats aside) was pretty much a no brainer previously... with this change coming in i think 2029 does it change much of anything?

Ive always been confused by NI, especially the way it uses weekly/monthly thresholds and also goes the opposite way to tax in that you pay a lesser rate above the upper threshold.

Is it as simple as sal sacrifice will still be beneficial from an income tax perspective but you won't also now enjoy the national insurance relief as well (making sal sacrifice much more akin to making personal payments into a SIPP)

QrizB

Mistermeaner said:

Is it as simple as sal sacrifice will still be beneficial from an income tax perspective but you won't also now enjoy the national insurance relief as well (making sal sacrifice much more akin to making personal payments into a SIPP)

This is what we're expecting, yes.

artyboy

It basically means that any salary sacrificed into pension above £2000/year will get NI charged on it. There will be no change to the existing income tax avoidance benefit that comes with it.

ironically this hits the lower paid worse, as they will get hit with an 8% charge, whereas higher earners will only pay 2%. At least that's how I currently read it, but perhaps Rachel will give more detail shortly.

Also unclear is whether employers will also get hit with their own NI charge - because if so, many may just give up on salsac schemes entirely. At the very least, you could expect any employer matching contributions to get a lot less generous in future.

Strummer22

Mistermeaner said:

Is it as simple as sal sacrifice will still be beneficial from an income tax perspective but you won't also now enjoy the national insurance relief as well (making sal sacrifice much more akin to making personal payments into a SIPP)

Correct.

You can sal sac £2k without paying NI.

If you're a higher rate taxpayer you'll pay the 2% NI due (mechanism for payment TBC) on any sal sac above this.

If you're a basic rate taxpayer you'll pay the 8% NI due on any sal sac above this (so much for Labour being for "working people"). 

Your employer will also have to pay their employer's NI on contributions >£2k. If they currently pass on to you some/all of this saving, they won't be able to do that any more, as the Gov will get it. 

P-Nuts

What happens if your salary sacrifice takes you from above the higher rate threshold to below it? Does that mean the £2k allowance applies to your 8% band or your 2% band?

For example, a salary of £55k and sacrificing £10k, thus ending up with a post sacrifice salary of £45k.

Strummer22

P-Nuts said:

What happens if your salary sacrifice takes you from above the higher rate threshold to below it? Does that mean the £2k allowance applies to your 8% band or your 2% band?

For example, a salary of £55k and sacrificing £10k, thus ending up with a post sacrifice salary of £45k.

I'm sure it'll be covered in the guidance to be issued before Apr 2029. I would expect that in this scenario you get the £2k allowance, then pay 8% NI on £3k (ish) and 2% on £5k (ish). 

pochisoldi

P-Nuts said:

What happens if your salary sacrifice takes you from above the higher rate threshold to below it? Does that mean the £2k allowance applies to your 8% band or your 2% band?

For example, a salary of £55k and sacrificing £10k, thus ending up with a post sacrifice salary of £45k.

You go from NI calculated on £45k to NI calculated on £53k.

Lets pretend you start paying 2% NI at £50k.
that means that of the £8k that currently attracts 0% NI, £5k will attract 8% NI, and the remaining £3k 2% NI.

(Edited to remove info regarding employers NI, as the info out there seems sketchy as to whether salary sacrificed employee contribs are liable for employers NI or not)

Albermarle

Strummer22 said:

Mistermeaner said:

Is it as simple as sal sacrifice will still be beneficial from an income tax perspective but you won't also now enjoy the national insurance relief as well (making sal sacrifice much more akin to making personal payments into a SIPP)

Correct.

You can sal sac £2k without paying NI.

If you're a higher rate taxpayer you'll pay the 2% NI due (mechanism for payment TBC) on any sal sac above this.

If you're a basic rate taxpayer you'll pay the 8% NI due on any sal sac above this (so much for Labour being for "working people"). 

Your employer will also have to pay their employer's NI on contributions >£2k. If they currently pass on to you some/all of this saving, they won't be able to do that any more, as the Gov will get it. 

I would suspect that not many lower paid people  will be paying more than £2K into a pension.
Although on balance the figure would probably be fairer if it was a bit higher.

michaels

Still haven't defined what is sal sac and what is a change to contract pension vs salary.  Note in my CS job I get an employer contribution of 29% or something like that but presumably if a private sector employer tried to set up a contract paying that much into a pension it would be deemed to be sal sac.  One rule for the public sector, a different one for the wealth creators.....

ex-pat_scot

My initial reading of this is that contractual pensions - where you have to contribute (say) 10%, or effectively your employer has a non-contributory pension - would not be impacted.
Where you can opt / select a %, such as the traditional employer-match type arrangements, such schemes are discretionary and therefore the amount of salary you sacrifice would be part of the new arrangement.
If this is a correct reading, then I would expect that. over time, packages move from a matching arrangement to a fixed arrangement. This helps the employer manage its costs and exposure to any future meddling.
This is going to have a disproportionate impact at the marginal thresholds for child benefit reduction (£50,000-£60,000) and the personal allowance withdrawal (£100,000 to £125,000 or so). It will also impact edge cases such as those persons preferring salary to pension, either from family cash flow reasons, or because of MPAA having been triggered, etc.

MetaPhysical

So glad I whacked everything I could into my pension whilst I had the chance - 40k and 60K per year for the past ten years.  Sounds like you'll still be able to up to 2029.