Contributing to NEST (Tax Question!)

ian1246 · 29 January 2019 at 1:20PM

Hi Guys.
Just want to double check something with yourselves - currently my wife's (turns 27 tomorrow!) pension is with NEST. She has previously asked her employer to increase her personal contributions so that they are around £170.00 a month (Her income is more or less the same every month). Unfortunately, her employer has not done this (The payroll lady doesn't have a clue when it comes to NEST/Pensions!).

This means that her personal pension contributions have remained the standard rate - 2.4% of the qualifying amount (with an additional 0.6% government tax rebate on top of that). That means roughly £27.94 a month contribution is taken from her wages for her pension.

Given we ve lost patience with her employer, we ve now set up a direct debit from her bank account to contribute an additional £145.00 a month into her pension - bringing the total pension contribution by her to £172.94 a month. NEST then claim the 20% Tax back on top of that, to go into her pension.

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My question is, are we any worse off in terms of tax & national insurance paid by doing it this way (Contributing extra from her bank account) than if it was deducted directly from her wages by the employer?

I ve been getting a bit confused to be honest - my gut feeling is that we would be better off paying it as part of her wages than from the bank account, is this correct?

Paul_Herring · 29 January 2019 at 2:18PM

From the numbers supplied, I'm guessing your wife is on around (£27.94÷2.4%×12+£6,032) £20k.

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At that level, income tax is no different between employer contributing it from gross wages, and your wife contributing out of net wages and getting a rebate.

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National insurance may or may not be worse off if your wife contributes from net pay, depending on how your employer deducts the contributions on their end.

If they're doing via "net-pay", then there won't (I think) be a difference since the NI is deducted either way.

If they're doing it via salary sacrifice then you may be worse off by what the extra SS could save in NI: a gross sacrifice of (£145/80%) £181.15 would not incur (£181.25*12.8%) £23.20 of NI which is otherwise being paid if your wife contributes out of after-tax pay.

ian1246 · 30 January 2019 at 12:01AM

Thanks for the response. Unfortunately her workplace doesn't offer salary sacrifice!

Paul_Herring · 30 January 2019 at 12:29AM

Unfortunately her workplace doesn't offer salary sacrifice!

Then it would appear that there is little difference (as far as tax/NI is concerned) between work doing it or your wife doing it.

Do note that the percentages will be going up in April from 3% employee to 5% employee: https://www.nowpensions.com/help-centre/faqs/contributions/what-are-auto-enrolment-contribution-rates

You may want to
(1) make sure it happens with work, along with theirs going up from 2% to 3%
(2) adjust, if you wish, whatever extra you're adding from net pay.

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... with hindsight, that "2.4% of the qualifying amount" looks wrong - are you sure about that figure?

planteria · 16 February 2019 at 10:16PM

Paul_Herring wrote: »

..(1) make sure it happens with work, along with theirs going up from 2% to 3%..

..is essential. i imagine that the unhelpful lady in payroll will actually manage to adhere to these changes, but be vigilant.

i like the direct approach you've taken re. setting up a DD, and ultimately it is your wife's own pension pot... but if i were you i would still try to get them to set things up properly in her employer's payroll department. perhaps writing a clear letter to them, setting out exactly what you want to happen, and asking any questions you have might be better than calls/in person conversations, if that is how things have been approached so far:undecided. putting things on paper can focus the mind of someone who's not very skilled/interested, as there is then a clear paper trail which will demonstrate their lack of skill/interest. i've certainly used that approach with a payroll/accounts department myself;).

good luck getting things set up as you want them.

ian1246 · 18 February 2019 at 3:10AM

Hi Guys.
Thanks for the responses. Since creating this thread, I did a little more digging regarding the minimum employee contributions into NEST:

https://www.thepensionsregulator.gov.uk/en/employers/managing-a-scheme/contributions-and-funding

Basically, scrolling down about half way - NEST use "relief at source". To quote the relevant section about relief at source: "Staff contribution is 80 pence in the pound, after tax has been deducted (i.e. 2.4% of qualifying earnings is taken from net pay). The pension provider will claim 20 pence in the pound from HRMC and add to the pension pot."

So that accounts for the 2.4% Pay going into the pension!

I am now set up on my wife's NEST Pension as a delegate, so I can keep a close eye on her pension and what is going in. I will definitely be keeping an eye on her pension to check her employer puts the required 3% contribution in when we hit the new tax year.

My original reason for creating this thread was in part from playing with the UK Salary Calculator (something I generally use given its reliability) & noticing the difference in take home between the 2 options:

Option 1: £20,000 Annual Salary & Student Loan (Plan 1) & 2.4% Auto Enrolment Deduction (£27.94 deduction) = £1,380.20 take home plus then the additional £145 Direct Debit NEST Contribution = effectively £1235.20 Take Home a Month with £172.94 going into her pension (plus 20% tax-rebate claimed by NEST from the government).

Option 2: £20,000 Annual Salary & Student Loan (Plan 1) & 15% Auto Enrolment Deduction (£174.60 deduction) = £1262.87 Take Home a Month with £174.60 going into her pension (plus 20% tax-rebate claimed by NEST from the government).

Does the above seem right? Since if it is, that would mean contributing extra into the pension via employer will be the best option (by around £30 a month!). Just can't get my head around why the difference exists in take home.

Either way, we have asked her employer to increase her contribution to 15% of the qualifying amount which they are supposed to be doing - will await with bated breath to see what her payslip at the end of February says!

Contributing to NEST (Tax Question!)

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