Advice needed re. salary sacrifice - effects on bonuses, 40% tax band

obsessed_saver

Hi guys,
I'm a little confused about my situation at the moment.

For 2007/08 tax year, my base salary was £35k.

Salary sacrifice was around £1700.

Then I had bonuses paid and the "amount taxable" according to my March 08 payslip was £42k, therefore I would have some income taxed at 40% (above the £5,225 + £34,600 = £39825 for 40% tax band).

As I understand it, I can't claim the 40% tax relief on my pension contributions because of salary sacrifice.

In this case, am I disadvantaged to be on the salary sacrifice scheme because the calculations were based on my base pay which was only in the 22% tax band, but my total income for the year is slightly above the 40% band?

Please help.


Cheers,
obsessed_saver

jonathon_hart

Does that £42k include the £1700 you sacrificed?

The sacrifice should have been deducted from your salary and then you would have been taxed on the remainder, meaning you automatically get it at your highest tax rate i.e. 40%

obsessed_saver

No, the £42k doesn't include the £1700 sacrificed.

Everything goes through PAYE, even the bonuses. So I guess I'm not losing out in any way then?

It's a little mind boggling and I've been trying to get my head round this concept for some time now.

bigbloke45

If you have "sacrificed" £1,700, then ,as this was never paid to you as salary, you have not been subject to Income Tax or N.I. contributions(if applicable) on this amount. This means you will have received tax relief at your "Full" rate; by this I mean that any tax you would have paid, basic rate or higher rate, will have been saved because you never received the £1700 in the first place, as far as the revenue are concerned.

One thing to always remember is that some advisers talk about "tax relief at your highest rate" on salary sacrifice or pension contributions, but you can only get tax relief at the rate you pay. If the S.S or pension contribution straddles your basic rate/higher rate band earnings, you will only get higher rate relief on the amount of earnings that fall above the basic rate band and the rest will be at basic rate but, hey, that's still OK!

It's better to think of it as "Salary Redirection" as you haven't really lost anything, but merely "redirected" that money to your pension.

As you know, these things have to be set up properly as the Inland Revenue (bless their hearts!) will other wise tax you as a "benefit in kind".

Assuming all is OK, have you asked your employer to also put you NI contrtibution saved into the pension? He hasn't had to pay it so why not let you benefit on the amount ha has saved?

obsessed_saver

Yes, the employer NI saving is being paid into my pension and my employer becomes "cost neutral" either way if I take the salary sacrifice or not.

Thanks for the response guys. I think I'm starting to see the picture now. Cheers.

bigbloke45

Well done on the e'er NI addition!

Just one small thing; do you think that 4% of salary is going to buy you a comfortable retirement?

Try working out your final salary, then how much of this you will need for a pension, then ,say multiply the pension by 20 to approximate the fund needed, then work back to see how much you need to put in as a percentage of your income.

These sums are not easy for most people as thy need some abilty with compound interst but, luckily, Mr. Internet can help you! A bit of "Googling" should point you in the right direction.

The next trick is not to panic! Things change over our lives, so the main thing is to keep updating your plan and don't put your head under the sand!

Best of luck, I'm sure you will do OK, because you are already doing something for your future, unlike so many others.

obsessed_saver

Thanks for the advice, bb45. Company is paying in 9% & will match up to 4%. So in total, I'm getting about 17% minimum (+ a bit extra from the salary sacrifice stuff). I think that is sufficient, no?

I have no idea what it might add up to in the future, but I'm not going to depend on it solely for my pension.

bigbloke45

That's more like it!

Dick_here

bigbloke45 wrote: »

Assuming all is OK, have you asked your employer to also put you NI contrtibution saved into the pension? He hasn't had to pay it so why not let you benefit on the amount ha has saved?

How much are they saving though ? Our SS scheme means we pay 4.75 instead of 5% into our pension. The company pushes hard for people to do this, so I assume they're saving more than .25% per person. I am saving the .25% though which is not much but is something for nothing as far as I can see. Is that right ?

jonathon_hart

The company doesn't have to pay employers NI on any amounts you sacrifice so it will save the company the amount you sacrificed times the applicable NI rate - which they will sometimes put into the pension for you - if they do that they save nothing.

Dick_here

As I said, I'm saving .25% by doing the SS. My pension contribution is around £120pm, so how much are they gaining out of it ?

And is it correct that with an AVC I'm still paying NI first, whereas if I put it into a SS instead I'd avoid a bit more NI ? I assume I'm not paying tax either way ?