Salary sacrifice with reduced tax code?

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82080156#Comment_82080156

not to my understanding. Its a simple one line entry they should have provided - they have done it on time this year it seems (and the amount has gone up so I can see HMRC reflects that) so hopefully this all settles by next year.

P60 for last year shows my taxable income as £54200 so I have a little leeway there although I’m starting to want to build some cash ISA for cashflowing the first year.. tempting though to nudge it a bit more

If I do the math my % sacrifice should get me down closer. So I think perhaps the medical insurance is affecting that and I’m not sure how that interacts.

eg if I earn 80k and my medical insurance is 2k and I sacrifice 50% of my gross salary - am I sacrificing 40k and then the medical insurance sits on top so 42k total? or is it 82k (salary + medical) and that reduces by 41k?

the amount that goes into my pension each month does seem to line up with the former. Does it make sense to sacrifice deeper into basic rate so that the medical sits there and I pay less tax on that?

QrizB

eg if I earn 80k and my medical insurance is 2k and I sacrifice 50% of my gross salary - am I sacrificing 40k and then the medical insurance sits on top so 42k total? or is it 82k (salary + medical) and that reduces by 41k?

That is entirely down to how your employer chooses to calculate it, but I'd expect it to be 40k of salsac, 42k of taxable rewards.

mrklaw

ok playing with math, some googling and some AI (dangerous combination). Is this correct?

• my current gross salary for 25/26 is £54298. that includes my salary sacrifice for the year and medical insurance BIK.
• if I sacrifice enough extra to bring that under 50270 it would
  • increase my pension contributions by the gross amount
  • bring the medical BIK taxed at 20% rather than 40% so I’d save £358 per year (BIK is £1791)
  • reduce my net salary by (gross contribution -42%) - £29.85 (358/12)

by my reckoning for this year ahead and next year,

• my gross salary after SS would be estimated 50,818
• medical insurance BIK is 1791
• so total gross with no changes would be 50818+1791=52,609
• if I increase my SS by 3000 then it would reduce gross income to 49609
• increased pension by 3k
• reduces my net salary by 3000-42%=1,740
• I’d save 358 tax on the medical BIK
• total reduction on net salary 1740-358=1,382 or £115pm net cost to me for 3k into pension?

DRS1

I suspect this line might be wrong

reduces my net salary by 3000-42%=1,740

You are reducing your income to 49609 so presumably part of that would only have been taxed at 20% not 40%. (50270 - 49609 = 661)

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82080366#Comment_82080366

Yep across the boundary it’s a bit fuzzy. I’d probably assume all of it 28% rather than 42% to see on the side of caution

but the double barrel of tax relief and £30pm roughly from reduced cost of the BIK starts to make me feel like pushing that little bit extra below 40% band rather than keep it in cash (would be going into a cash or S&S isa anyway)

GunJack

If your tax code is only 811L, aren't you going to have to salsac more, down to around £41k gross (taking the medical into account) to stay out of 40% tax??

Aretnap

https://forums.moneysavingexpert.com/discussion/comment/82080414#Comment_82080414

No. As already mentioned, the amount of tax you owe is determined by your income, not by your tax code. To stay out of 40% tax you need to keep take your taxable income (including any benefits in mind) below £ 50250 for the tax year.

Your tax code is irrelevant to that calculation - it determines how much is deducted from your paycheck every month, not how much tax you actually owe. Ideally the two numbers will match: if they don't it gets put right at the end of the year either with a refund or a requirement that you pay the shortfall (possibly by having more deducted from your paycheck next year through a reduced tax code).

mrklaw

ok rechecked my numbers. I think this is my route forwards

• increase pension contribution by 4% (takes me from 42-46% contribution - and with employer 5% tips me to 51% which is a nice psychological number)
• reduces total of gross income + medical BIK to £49k so there is decent buffer
• net cost to me £140pm comprised of £170pm from the pension, and a £30pm saving from the medical insurance.
• Already saving £300pm into S&S ISA so that reduces to £160
• My overall savings go from £3600 to £6000 through redirection towards pension.

Feels efficient, extracting the last few quid from BIK etc. It will slightly slow my liquid savings build up but I can deal with that separately, I’ll have the first two years in cash in the pension and then DB kicks in so I only need a small top up which will be covered by a gilt ladder so the need for large cash buffer isn’t there, more like 1 year for convenient cashflow only

Does this make sense? Kind of crazy I’m only 2.5 years from potential retirement and still things in the system that catch you out