Reducing window to draw pension income at basic rate

LL_USS

@Alexland now I got it thank you 

PS: still a bit surprised with myself I had never spotted that employees have that 2% NI rate after the basic income threshold.

zagfles

Alexland said:

LL_USS said:

@zagfles thank you - I did vaguely feel something along that line as Alex gave the 2% figure for NI saving. 

ALL THE WAY along the past 8 years of extra sal-sac into pension I thought I got all the 8% (or higher in the past) full rate as what I saved  because I thought, say if my gross pay was 3,000/m and I took out 1,000 from the gross pay to put into pension then I'd save 8% x 1,000 in NI as my NI at the end of the day was only counted on the remaining 2,000.

Had lunch with a colleague and funny enough without me prompting about pay and pension, he also mentioned this 2%NI saving too. 

My my my..... so many things I know wrong 

Yes that 2% is the employee NI saving when sacrificing income that would have otherwise been taxed at higher rate. At basic rate it's 8% NI currently but it was recently 10% and 12% before that see table 2.2 on the below page.

https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions

Not sure if the point of my PP was missed, but you can get relief at 40% tax and 8% NI on at least some of the sal sac using the method I described. This is because tax is assessed on annual income but NI is assessed on pay period income. 

Alexland

zagfles said:

Not sure if the point of my PP was missed, but you can get relief at 40% tax and 8% NI on at least some of the sal sac using the method I described. This is because tax is assessed on annual income but NI is assessed on pay period income. 

Thanks yes lumpy sal sac is a good consideration but to save that 8% on some of the contribution it would still require (at least on my salary) putting a lot more into the pension only saving 2%. If I went down to min wage for a month each year the blended result for that month still wouldn't in my view be worth locking the money away in a pension given the risk of further budget raids or income tax increases. I'd rather take the money now and probably retire even earlier with it. By freezing the thresholds they are taking away the incentive to keep going.

For example if someone is earning £100k and min wage next year is around £25k then if they dropped to min wage for one payroll period around 2/3 of the bumper £75k/12 contribution would save 2% NI and only 1/3 would save 8%. I appreciate they would probably be contributing some of that at 2% anyway to get employer matching but the result is still only just over 4% on the extra contribution above matching. For someone earning towards the bottom of the higher rate band say £60k it might be more worthwhile as they wouldn't have so much extra income to only save 2% on that month.

Cobbler_tone

I think the far greater impact is the freezing of the 20% band. I’d imagine the majority will be drawing between the two for many, many years to come. Either way, it’s not a surprise and plenty of time to plan. I’ve run my numbers and no obvious advantages of not SS to NMW now, unless they are frozen for a few more years and then the drawdown may be impacted, prolonged or taxed higher.

LL_USS

zagfles said:

You pay 8% NI on pay between the primary threshold and the upper earnings limit. For monthly pay these figures are £1048 and £4189. Over the UEL you pay 2% NI. 

So if your annual salary is £60000 (monthly £5000) and you want to sal-sac to get higher rate relief, you sal-sac £9730 a year, ie £811 a month, so your pay is now £50270, ie £4189 a month. So the tax saving is 40%, and the NI saving is 2%. 

If you're a bit more clever you can do lumpy sal-sac, ie sal-sac down to minimum wage for part of the year and no sal-sac for the rest. Min wage is around £26k depending on hours worked, ie £2167 a month. So you sal-sac £2833 for 3 months, £1231 for one month and nothing for the rest of the year. This would give you 8% NI relief on £6486 of your £9730 total sal sac, so you get 8% relief on two thirds of your sal-sac. 

But make sure to max company contributions, for instance if they base their conts on how much you contribute. So it may require a min sal sac to get max company conts. 

@zagfles actually last night I was already about to sleep then remembered the post above of yours and thought I'd revisit it after understanding a bit more about the NI rates for different amount (a month) - I hadn't even spotted that NI was 2% for the higher rate bracket until now, so very much I am doubting my ability to handle money "a bit more clever" now. But it's worth looking into this. See your other post later, as well as Alex's note after too. Perhaps trying to work this out would do my head in but I will try to understand, still. Thanks. 

@Alexland I don't intend to put more than I need into pension either - I only plan to have a basic pension whilst my salary is at the very low end of the high rate bracket AND my knowledge of investing is close to 0, so better let the USS do the heavy lifting job. For me it's better I focus on what I understand and feel I can do.