Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • Ballard
    • By Ballard 10th Mar 18, 11:13 AM
    • 1,861Posts
    • 1,656Thanks
    Ballard
    Salary Sacrifice - A no brainer?
    • #1
    • 10th Mar 18, 11:13 AM
    Salary Sacrifice - A no brainer? 10th Mar 18 at 11:13 AM
    I started a new job last summer and the pension contributions started immediately. My employer pays 10% and will match up to 7.5% of anything that I contribute. I have been paying the additional 7.5% since then. As a consequence I'm getting 25% paid into my pension on a monthly basis.

    I do have the option to increase or decrease my sacrifice and as I understand it I can pay up to 40% into the pot and avoid paying tax and NI on this portion. This has made me think that the thing to do for the upcoming year would be to sacrifice 22.5% which along with my employers 17.5% would give bring me to the 40% limit (it would actually still be below my 40% limit as not all of my salary is pensionable)

    Some pertinent points:

    My job security hasn't been great in recent years so I've saved in excess of a year's gross salary in cash. My prospects currently look good so I'm now looking to my retirement.

    I'm a higher rate tax payer but well under £100k so my 40% won't be £40k.

    I'm 49 and have a ball park retirement age of 62 but that's very much a flexible figure at this point.

    I live well within my means and probably wouldn't dip into my savings a great deal.

    The pension is trust based and operated by Standard Life. I have no idea whether or not this is relevant.


    As I see it the upside is that (roughly) for every £50 of my take home pay I sacrifice I'll get £100 added to my pension pot. The downside is that I can't access that pot for many years. Before I commit to putting this amount into my pension I want to make sure that I'm not missing something.

    I'm not keen on putting too much financial information on the forum but I hope that I've given sufficient for the purposes of my question.

    Thanks.
    I got a letter from the government the other day. I opened it and read it. It said they were suckers.
Page 2
    • HardCoreProgrammer
    • By HardCoreProgrammer 12th Mar 18, 12:23 AM
    • 116 Posts
    • 45 Thanks
    HardCoreProgrammer
    I am doing the same thing: sacrificing just under 40k per year (they only allow a whole number for percentage, so cannot get 40k precisely).

    My situation: mortgage paid off, have emergnecy fund and enough money in non tax exempt accounts to break the annual interest limit. By doing this, I am putting away nearly 60k into tax free accounts per year (with the 20k ISA allowance) and reducing the balance in my non tax free accounts.

    Part of the salary sacrifice only gets basic rate tax relief, but do not forget the 12% NI too, which no longer needs to be paid. The employer also adds the employers NI which they would have paid, so I get about another 13% on top.

    One more point which has not been mentioned yet: the favourable tax treatment may be taken away at some point in future, so I see it as a "last saloon" opportunity.
    Last edited by HardCoreProgrammer; 12-03-2018 at 12:27 AM.
    • starkiwi26
    • By starkiwi26 12th Mar 18, 6:05 PM
    • 60 Posts
    • 13 Thanks
    starkiwi26
    I am doing the same thing: sacrificing just under 40k per year (they only allow a whole number for percentage, so cannot get 40k precisely).

    My situation: mortgage paid off, have emergnecy fund and enough money in non tax exempt accounts to break the annual interest limit. By doing this, I am putting away nearly 60k into tax free accounts per year (with the 20k ISA allowance) and reducing the balance in my non tax free accounts.

    Part of the salary sacrifice only gets basic rate tax relief, but do not forget the 12% NI too, which no longer needs to be paid. The employer also adds the employers NI which they would have paid, so I get about another 13% on top.

    One more point which has not been mentioned yet: the favourable tax treatment may be taken away at some point in future, so I see it as a "last saloon" opportunity.
    Originally posted by HardCoreProgrammer
    I am kind of jealous on you all having good salary and can max out the pension and ISA.
    I am relatively younger at 35 years old now, my salary just reach higher tax band last year, so I commit to myself to limit my taxable income at £45k level by contributing all bonus and salary above £45k to pension (to escape the fate of 40% higher tax band). But this is only 10% of the 40k allowance only
    • AlanP
    • By AlanP 13th Mar 18, 12:53 PM
    • 1,206 Posts
    • 866 Thanks
    AlanP
    I am kind of jealous on you all having good salary and can max out the pension and ISA.
    Originally posted by starkiwi26
    Don't be - the vast majority of people in the UK do not get anywhere near the HR tax band, most would be jealous of you

    Many posters on here are generally, exceptions to the norm, if you have no interest in pensions / investing and/or have no money to invest you are unlikely to be posting a great deal on the forum.
    • Snakey
    • By Snakey 13th Mar 18, 3:57 PM
    • 1,064 Posts
    • 1,282 Thanks
    Snakey
    Kiwi, I assume the salary for your chosen career doesn't max out at £50k since you've reached that by 35. So don't depress yourself by comparing apples and oranges (you vs a 49-year-old).

    I only started stuffing my pension in my early thirties, and even then "stuffing" was a relative term - like you, I was just doing it to stay under the higher rate bracket and it was just a few grand. But every time I got a pay rise or a promotion, it all went to the pension. Even when I was on £60k, £70k, £80k... I would have considered the amount to have "got silly" had I actually really stopped to think about it, but I never did. It was only when they bought in the £50k (at the time) annual allowance and I realised I was going to have to reduce my payments and discovered how few people in the country were in that position!

    But anyhow, I'm 45 now and got nearly £1m in there, and (as Alan suggests) the adjusted salary was still plenty high enough to have fun along the way so I didn't lose out on anything (except maybe with hindsight I should have taken the cash as salary and bunged it into central London residential property).

    So, hypothetically, I could have been you now/you could be me in a decade. OK the stock market will do different things for you than it did for me as it'll be different times, but if you are comfortable living on £45k indefinitely but still prepared to work at building your career even though you don't need to in order to enjoy today, you'll be fine.
    • MoneySavingUser
    • By MoneySavingUser 16th Mar 18, 9:29 PM
    • 1,625 Posts
    • 647 Thanks
    MoneySavingUser
    Previously hmrc rules was only 1 change in sal sac per tax year, now any restriction will be employer imposed.
    Originally posted by michaels
    Agreed the HMRC limit on only allowing changes when a "lifestyle event" occurs has been removed on the basis that it conflicts with auto-enrolment legislation.

    In general, I agree that salary sacrificing as much as you can is a good idea - savings at higher rate are around 42 % (40% tax and 2% NIC)

    At basic rate 32% (20% tax and 12% NIC) - the NIC bands aren't quite aligned with the income tax bands so there is a bit where it is different

    Just need to be careful of:
    - hitting annual allowance
    - hitting lifetime allowance
    • lisyloo
    • By lisyloo 17th Mar 18, 7:51 AM
    • 21,877 Posts
    • 10,582 Thanks
    lisyloo
    I also get 13.8% employers NI in addition to 20+12.
    • Reckless Saving
    • By Reckless Saving 17th Mar 18, 12:29 PM
    • 41 Posts
    • 28 Thanks
    Reckless Saving
    Agree with it being a no brainer option to take, I've been in it over 10 years, took a year or so in deciding to join as didn't get that it was goverment endorsed, wasn't a trusting person of my employer back then.

    Last couple years my income has hovered around the 40% tax bracket, so I've make a point of adjusting my percentage into pension to keep me below the 40%, my employer me to make adjustments once a month. Also at a point where I have to pay tax on dividends, more so next tax year when allowance goes down to £2000, so adjusting my percentages also to have enough of a buffer so my dividend tax rate is at 7.5% instead of 32.5%. My bonus when lucky to get one also goes into pension under salary sacrafice with my employer uplifts 10% on top.
  • jamesd
    Once I pick a rate I have to stick with it for a year with a few exceptions such as moving or marriage.
    Originally posted by Ballard
    The descriptions may say that but for the pension part of salary sacrifice HMRC removed the restriction a few years ago. My big employer first accepted pension change requests by email at any time then set up an online form for them.It could easily get an extra few thousand Pounds into your pocket instead of taken by HMRC.

    The 10% extra gain for you is on the part of pay where the concentrated sacrifice means you're saving basic rate range NI but still saving higher rate income tax. Just how much is within this band depends on your total taxable income and how much of you pay minimum wage is.

    My workplace has a 50% limit but they waive that once you satisfy the pension administrator that it won't cause you hardship. It's just to protect employees, not anything rigid.
    • westv
    • By westv 18th Mar 18, 6:22 PM
    • 4,546 Posts
    • 2,138 Thanks
    westv
    My current employer does sal sac but it looks like I'm going to be TUPEd mid year to a company that doesn't. Effectively a pay cut for me.
  • jamesd
    You're only six years fromm 55 so then pension lock-in isn't so long for most of the money. Allowing for NI and employer contributions the 25% tax free lump sum could well end up being more than half of your own out of pocket pension contribution. Conceivably all of it, depending on the exact mixture of matching, NI and income tax rates involved.

    Nothing inherently bad happens when you take some pension money at 55 but the pot inside the pension does then become available to creditors in bankruptcy and the part you take out to all creditors.

    If you confine yourself to taking the tax free lump sum and using the small pot rule you can continue to make pension contributions as before. If you take an uncrystallised funds pension lump sum or take any money from a flexi-access drawdown pot you'll trigger the money purchase annual allowance and restrict contributions by anyone into pension pots in your name to £4,000 a year with you paying an income tax charge on amounts above this.

    There are many good reasons for taking money at 55. These include:

    1. Protecting against the lifetime allowance.
    2. Eliminating optional mortgage payments and making pension contributions instead then catching up on the mortgage plan after having received the pension tax and NI benefits on the money.
    3. Flexibility to invest in things that are hard, expensive or impossible to do within a pension.
    4. Recycling all or part of the pension lump sum into new pension contributions, within the permitted limits for this.

    The tax free lump sum on my own pensions is already more than one and a half times my mortgage so I'm already effectively getting a free mortgage payoff. Not yet at the point where salary sacrifice NI savings and saved employer NI contribution will cover it all, and may never get there.
  • jamesd
    I'm 49 and have a ball park retirement age of 62 but that's very much a flexible figure at this point.
    Originally posted by Ballard
    My plan would be not to touch the pot until retirement but obviously things can easily change in the minimum 13 years until I get to retire.
    Originally posted by Ballard
    Why so far into the future for retirement?

    I wonder whether you've worked out your minimum, good target and nice to have income levels and taken a look at Drawdown: safe withdrawal rates to get an idea of what's doable on the generation of income from capital side.
    • Alexland
    • By Alexland 18th Mar 18, 8:52 PM
    • 2,601 Posts
    • 1,981 Thanks
    Alexland
    My current employer does sal sac but it looks like I'm going to be TUPEd mid year to a company that doesn't. Effectively a pay cut for me.
    Originally posted by westv
    Do you have a contractual right to salary sacrifice without employer power to vary or withdraw the benefit? If so you may have a case for the salary sacrifice to continue with the new employer or to be given a suitable allowance as compensation.

    Alex.
    • westv
    • By westv 18th Mar 18, 10:34 PM
    • 4,546 Posts
    • 2,138 Thanks
    westv
    My current employer does sal sac but it looks like I'm going to be TUPEd mid year to a company that doesn't. Effectively a pay cut for me.
    Originally posted by westv
    Do you have a contractual right to salary sacrifice without employer power to vary or withdraw the benefit? If so you may have a case for the salary sacrifice to continue with the new employer or to be given a suitable allowance as compensation.

    Alex.
    Originally posted by Alexland
    I think my contract only refers to employer contributions.
    • AlanP
    • By AlanP 19th Mar 18, 12:14 PM
    • 1,206 Posts
    • 866 Thanks
    AlanP
    My current employer does sal sac but it looks like I'm going to be TUPEd mid year to a company that doesn't. Effectively a pay cut for me.
    Originally posted by westv
    In fact it will mean a pay rise for you won't it as your actual salary will increase?

    You may not be better off though unfortunately.
    • lisyloo
    • By lisyloo 19th Mar 18, 12:27 PM
    • 21,877 Posts
    • 10,582 Thanks
    lisyloo
    I think my contract only refers to employer contributions.
    Originally posted by westv
    Unfortunately non-contractual "perks" are not obligatory.
    However you should have a consultation and representatives, so this process should be used.
    I've recently been through this and we obtained an extra 3 "personal" days leave via the tupe process as we made it very clear there was a lot of unhappiness about losing these even though they weren't contractual.

    If it has a massive effect on you then clearly you need to consider your position, but do't rule out consulting your new employer first - they may not have appreciated this especially if they are not familiar with the UK system.
    • Anonymous101
    • By Anonymous101 19th Mar 18, 3:47 PM
    • 1,095 Posts
    • 484 Thanks
    Anonymous101
    Whilst I think that generally contributing as much as possible into your pension is the most efficient way to save for retirement from a tax point of view there are a couple of circumstances where it may not be the preferred way of making additional savings.

    The main one for me is if you have a desire to retire early or have a change of career where your earnings may change significantly before you are 55.

    The main concern I have is that I may well have sufficient monies saved within my pension for my retirement however if I wish to retire before I can access them then putting more money into the pension is not going to allow me to retire any earlier. Saving into accessible "post tax" accounts is the only way to do this even if its less efficient.

    I've been thinking about this a lot over the last year or so and have decided that as I'm 36 and contributing around 25% of my salary into my pension any further savings would be best made elsewhere. I'd like to retire before the age of 55 and will need a reasonable amount of accessible savings to draw upon to bridge the gap as it were. If in another 10 years I think I may work until retirement age I will hopefully be able to back-fill my pension with the post tax investments and reap the tax advantage then. Obviously I'll miss out on the growth of the gross amount rather than the net but that's a small price to pay for the upside of the flexibility in my opinion.

    On top of that there is possibility that either the higher rate relief may be taken away but also the possibility that minimum age of 55 will be increased.

    It's a balancing act for me.

    NB For you at 49 years old the minimum age is much less of a risk and I'd think that putting as much as you can into your pension, provided you have sufficient accessible savings, would be the best route.
    Last edited by Anonymous101; 19-03-2018 at 4:09 PM.
    • lisyloo
    • By lisyloo 19th Mar 18, 3:51 PM
    • 21,877 Posts
    • 10,582 Thanks
    lisyloo
    but also the possibility that minimum age of 55 will be increased.
    I don't think this will be done for people who are "close" to 55.

    Agree totally that one has to balance the benefit/flexibility.
    • Anonymous101
    • By Anonymous101 19th Mar 18, 4:06 PM
    • 1,095 Posts
    • 484 Thanks
    Anonymous101
    I don't think this will be done for people who are "close" to 55.

    Agree totally that one has to balance the benefit/flexibility.
    Originally posted by lisyloo
    I agree its unlikely to effect anyone in their 50's but for someone who has 15-20 years until they are able to access pension savings its much more of a risk.
    • westv
    • By westv 19th Mar 18, 8:25 PM
    • 4,546 Posts
    • 2,138 Thanks
    westv
    In fact it will mean a pay rise for you won't it as your actual salary will increase?

    You may not be better off though unfortunately.
    Originally posted by AlanP
    I'll need to pay more to get the same level of contribution to my pension as it'll be the net after tax rather than after tax and NI.
    • lisyloo
    • By lisyloo 19th Mar 18, 8:40 PM
    • 21,877 Posts
    • 10,582 Thanks
    lisyloo
    I agree its unlikely to effect anyone in their 50's but for someone who has 15-20 years until they are able to access pension savings its much more of a risk.
    Originally posted by Anonymous101
    Agreed. Itís a much greater risk in general for someone younger. All sorts of things could happen around health, relationships, work, offspring.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

144Posts Today

1,626Users online

Martin's Twitter
  • Ah these care free days of watching #ENG score 5 goals in the first half of a World Cup match. It reminds me of... Never.

  • Then it should be. It's not some accident. It's deliberate grappling https://t.co/UxVTuUSNio

  • Penalty yes but time someone was sent off for these wrestling moves #WorldCup

  • Follow Martin