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  • FIRST POST
    • lynxthecat
    • By lynxthecat 12th Mar 18, 5:19 PM
    • 11Posts
    • 0Thanks
    lynxthecat
    Salary exchange and six-figure curse
    • #1
    • 12th Mar 18, 5:19 PM
    Salary exchange and six-figure curse 12th Mar 18 at 5:19 PM
    Consider a remuneration package of:

    - £110,000 p.a. base
    - variable bonus paid in month of May each year
    - 6% employer pension contribution based on £110,000 [£6,600 p.a.]

    Would the following salary exchange mechanism work, mindful of the annual allowance and associated pension provisions:

    1) £12,000 p.a. from base salary exchanged as employer pension contributions, i.e. £1,000 per month

    2) Bonus is exchanged as one-off employer pension contribution up to and not exceeding the value of £20,000

    3) Any remaining bonus is paid as normal

    Thus if bonus exceeds £20,000, then the above system should result in an annual pension contribution of:

    6% of £110,000, which is £6,600 + £12,000 base sacrifice + £20,000 bonus sacrifice,

    ... which totals £38,600.

    Which is below the £40,000 annual allowance.

    Does the above system seem reasonable?
    Last edited by lynxthecat; 12-03-2018 at 5:21 PM.
Page 1
    • EdSwippet
    • By EdSwippet 12th Mar 18, 8:04 PM
    • 706 Posts
    • 661 Thanks
    EdSwippet
    • #2
    • 12th Mar 18, 8:04 PM
    • #2
    • 12th Mar 18, 8:04 PM
    Does the above system seem reasonable?
    Originally posted by lynxthecat
    This looks right to me. At these salary levels you might also have to watch out for the miserable tapered annual allowance. Remember that the income level for triggering this taper includes not just salary but all taxable income. So salary, dividends, interest, rental income, and so on.
    • Snakey
    • By Snakey 13th Mar 18, 12:13 PM
    • 1,060 Posts
    • 1,281 Thanks
    Snakey
    • #3
    • 13th Mar 18, 12:13 PM
    • #3
    • 13th Mar 18, 12:13 PM
    Check that your employer doesn't give you an uplift on any "employee" contributions. If they were to, say, add on the 13.8% employers' NIC saving, you'd need to recalculate your amounts so as not to go over the limit.

    That said, if this is a new and shiny system of yours and you previously only did 6% (or even 6% matched) you would have some brought-forward annual allowance to cushion you for the first three years and it would be worth doing that to avoid the 62% marginal rate.
    • Workerbee999
    • By Workerbee999 14th Mar 18, 7:36 AM
    • 36 Posts
    • 2 Thanks
    Workerbee999
    • #4
    • 14th Mar 18, 7:36 AM
    • #4
    • 14th Mar 18, 7:36 AM
    Hi

    Sorry to hijack the thread, but I am in a very similar position to this, and have another 2 years of carry back left to utilise. It is working well as I canít face the 62% tax rate.

    But on the other hand my OH has a gap between planned retirement at 55 and DB pension at 63 where we really should be building up a sepater pot for him where he can at least draw the 25% tax free amount and the annual tax free personal allowance. Particularly as he would get 40% tax relief on the majority of it.

    We canít do both, so how do I work out if it is worth taking the 62% hit to build a separate pot for him instead? I keep going in circles...
    • mgdavid
    • By mgdavid 14th Mar 18, 9:08 AM
    • 5,594 Posts
    • 4,916 Thanks
    mgdavid
    • #5
    • 14th Mar 18, 9:08 AM
    • #5
    • 14th Mar 18, 9:08 AM
    .........

    We canít do both, .....
    Originally posted by Workerbee999
    yet you both pay HRT?
    You absolutely sure you can't do (a bit of) both??
    The questions that get the best answers are the questions that give most detail....
    • lynxthecat
    • By lynxthecat 14th Mar 18, 9:59 AM
    • 11 Posts
    • 0 Thanks
    lynxthecat
    • #6
    • 14th Mar 18, 9:59 AM
    • #6
    • 14th Mar 18, 9:59 AM
    Am I correct that with the system above, for the first few years in respect of the unused allowance from previous years, private pension contributions can be made (which receive 20% relief at pension provider) and tax relief can be claimed from HMRC on the marginal rate?
    Last edited by lynxthecat; 14-03-2018 at 10:13 AM.
    • bowlhead99
    • By bowlhead99 14th Mar 18, 12:10 PM
    • 7,832 Posts
    • 14,303 Thanks
    bowlhead99
    • #7
    • 14th Mar 18, 12:10 PM
    • #7
    • 14th Mar 18, 12:10 PM
    Am I correct that with the system above, for the first few years in respect of the unused allowance from previous years, private pension contributions can be made (which receive 20% relief at pension provider) and tax relief can be claimed from HMRC on the marginal rate?
    Originally posted by lynxthecat
    The way I think of it or that the amount that can end up in your pension gross is the lesser of £40k and [earnings including the DC contribution from your employer] ; but the figure of £40k may be reduced by taper (if you had a big bonus and ended up on £150k+), and increased by the carry-forward available from previous years where you didn't use your full [£40k or less if tapered down for high earnings].

    So if I'm reading your question correct, then when you first start following your plan you will likely have some spare unused allowance from previous years - and yes, you can use that up by making personal contributions out of your taxed salary into a pension. E.g. £800 into pension from your after-tax salary, provider will claim a gross up from HMRC in due course, and separately you tell HMRC what you paid in via your tax return and they work out that the £1000 in your pension should have only cost you (e.g.) £400 if you're in the awkward 60% tax bracket, or £600 if you're in the 40% bracket at that stage, or a blend of the two depending on your actual marginal rate of tax for that £1000. So you'll get back the difference between the £800 you paid and the [£400 to £600] it should have cost you to make that £1000 gross contribution.

    Effectively what you end up paying ends up being your marginal rate and of course if you did an absolutely massive contribution that marginal rate on some of the contributions might only be 20%, but you'd probably have the sense to stop and carry forward for future years to save at 40-60% instead...

    The extra amount of carry forward from previous years, you don't *have* to do as a private contribution, in theory If you had visibility over your spare cash and likely bonus and amount of known carry forward available you could just ask your employer to let you sacrifice even larger amounts and save even more NI. But employer HR or payroll depts typically get nervous about letting someone exchange over £40k in a year because of feeling some kind of implicit responsibility to check your carry forward allowance exists, which they can't do without knowing your private financial details and they're not tax advisors. So a private contribution yourself before 5April is usually the way to go.
    Last edited by bowlhead99; 14-03-2018 at 12:15 PM.
    • Workerbee999
    • By Workerbee999 14th Mar 18, 11:00 PM
    • 36 Posts
    • 2 Thanks
    Workerbee999
    • #8
    • 14th Mar 18, 11:00 PM
    • #8
    • 14th Mar 18, 11:00 PM
    yet you both pay HRT?
    You absolutely sure you can't do (a bit of) both??
    Originally posted by mgdavid
    Ok. Perhaps ďcanítĒ is the wrong thing to say. We probably could if we prioritise it over all else, but our current expectation of our DB and DC pots suggest that our existing level of combined contributions will comfortably provide what we need from 55 and so we would prefer any extra savings to go into ISAs to build up savings we could access before we are 55 if we retire earlier.

    So I was trying to work out which the best option is for a given level of pension contribution. Save 62% tax/NI for my salary sacrifice with the risk of 40% tax when I take it. Or put the 38% ďtake homeĒ in a SIPP/personal pension for OH, plus the extra 20% tax saving via their tax code & get it grossed up by 20% and then take it out tax free.

    Am I right in thinking that both options are more or less the same, unless I can save 62% tax on the way in and only pay 20% on the way out - which would be the best case?

    1) 10,000 in Pension, pay 40% tax on it when I take it = 6,000 after tax. Cost to me: 38% of 10,000 = 3,800.

    2) Take 10,000 as salary, take home 3,800 after tax. Adjust OH tax code for this contribution and get 20% relief in tax code = 950. Put 4,750 into SSIP, get 20% Gov top up = 5,930. Take it out tax free
    • kidmugsy
    • By kidmugsy 15th Mar 18, 12:15 PM
    • 10,539 Posts
    • 7,219 Thanks
    kidmugsy
    • #9
    • 15th Mar 18, 12:15 PM
    • #9
    • 15th Mar 18, 12:15 PM
    So salary, dividends, interest, rental income, and so on.
    Originally posted by EdSwippet
    Plus the employer's contribution and salary sacrificed. It's rather easy for the very highly paid to find that their Adjusted Income exceeds £150k. Then unless their threshold income is less than £110k the taper sets in.

    In the OP's shoes if I had enough unused Annual Allowance to carry forward I'd opt to try to avoid the 60% tax band. After all, unused carry forward won't last for ever. Seize the day.

    This chap is good on the subject.
    https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/
    Free the dunston one next time too.
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