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Where Taxpayers and Advisers Meet

Adjusted Net Income & Employer Pension Contributions

dt8472
Posts:2
Joined:Fri Apr 03, 2020 12:38 pm
Adjusted Net Income & Employer Pension Contributions

Postby dt8472 » Fri Apr 03, 2020 1:39 pm

Hi All,

I am fortunate enough to earn over £100k through employment, contribute to my group personal pension via relief at source and file a self-assessment tax return each year (to claim the higher-rate tax back). I adjust my pension contributions to offset against my income to ensure my Adjusted Net Income (ANI) is below £100k so my income tax personal allowance is not reduced and it is also a requirement for Tax Free Childcare (ANI<£100k) for which I apply to help pay for my child's education.

Hopefully all the above makes sense and is correct.

Now, I have been made aware by my employer that I could contribute to my pension via salary sacrifice instead and save on NICs. However, are pension salary sacrifice contributions (i.e. employer contributions) included in the ANI calculation? If so (and one cannot offset these contributions against income because they are not taxed) then my ANI would be >£100k and it would not achieve the same result as normal employee contributions.

I have tried searching online for confirmation but have found lots of conflicting information, perhaps the rules changed recently or something, but any help on the above would be most appreciated.

Many thanks!
DT

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby Lambs » Fri Apr 03, 2020 2:44 pm

D,

This is a good technical question. Most people "instinctively know" that employer contributions are not taxable, but not necessarily why.

In fact for most people they would be taxed under the broad scope of the earnings provisions if it were not for specific exclusion. An employer pension contribution does not count as taxable income, so does not fall within the scope of adjusted (net) income either, by reason of the exclusion at ITEPA 2003 s 308.

Employer contributions do, however, suffer constraint in terms of the Annual Allowance. The Annual Allowance of £40,000 applies to the aggregate of employee and employer contributions, and its purpose is to limit (or offset) the tax relief that would otherwise arise. While there is a facility to bring forwards unused relief from earlier years, a distinct Income Tax charge arises to offset the relief given on any contributions that exceed the Allowance - even those made by an employer. This might seem unfair but note that you can make a "Scheme Pays" election so that your pension fund reimburses HMRC directly (even though you are supposed to report the breach in your Self Assessment tax return).

For high earners, the Annual Allowance of £40,000 can be reduced, or 'tapered'. But it seems unlikely to apply to you, given the income level, etc., as you have broadly described (and it the level at which the Annual Allowance is tapered, is set soon to rise to c£200,000+ to protect NHS practitioners). If you have any concerns about the Annual Allowance, tapered or otherwise, then you should consult a suitably qualified professional.

With regards,

Lambs

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby robbob » Fri Apr 03, 2020 6:25 pm

However, are pension salary sacrifice contributions (i.e. employer contributions) included in the ANI calculation?
Nope

Note for the ANI calculation (looking at only pay of x and salary sacrafice of y) its your P60 taxable pay figure that is used with no adjustments ref any salary sacrafice amounts that your employer will have made as their employers contributions, so you will get the desired result due to the fact that your taxable pay is lower by salary sacrafice amount than it would have been without.

I am pretty sure that for the ANI calcs any lfl pension adjusts (grossed up total!) always end up in a consistent result that gives the same treatment.

This site has a concise explanation - the lack of any adjustment needed for salary sacrafice pension amounts paid by your employer confirms everything is ok.
https://www.rossmartin.co.uk/private-client-a-estate-planning/income-losses-claims-reliefs/1448-adjusted-net-income

dt8472
Posts:2
Joined:Fri Apr 03, 2020 12:38 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby dt8472 » Sat Apr 04, 2020 10:32 am

Many thanks Lambs and robbob, this is good news!

One last question (as i didn't want to complicate it the first time round), how about normal employer pension contributions (i.e. employer contributions not resulting from an employee's salary sacrifice)? Are they included in the ANI?

Much appreciated,
D

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby Lambs » Sat Apr 04, 2020 2:15 pm

D,

No, for the same reasons as laid out in my original post - ITEPA 2003 s 308.

Strictly, most salary sacrifice arrangements ARE taxable by reference to ITEPA 2003 s69A, as introduced by FA 2017. However, ITEPA 2003 s 228A specifically excludes employer pension contributions made under the aforementioned s 308 from that new sprawling "optional remuneration arrangement" regime.

In other words:

Employer contributions generally are not taxable by virtue of ITEPA 2003 s 308

Employer contributions specifically offered by way of salary sacrifice (i.e., the optional remuneration arrangements as HMRC calls them) are STILL not taxable DESPITE the new ITEPA 2003 s 69A, also because of ITEPA 2003 s 308 (but in addition by the exemption afforded by ITEPA 2003 s 228A)

Kind regards,

Lambs

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby robbob » Mon Apr 06, 2020 6:39 pm

and they say life doesnt have to be taxing :)
Employer contributions specifically offered by way of salary sacrifice (i.e., the optional remuneration arrangements as HMRC calls them) are STILL not taxable DESPITE the new ITEPA 2003 s 69A, also because of ITEPA 2003 s 308 (but in addition by the exemption afforded by ITEPA 2003 s 228A)
hmmmmm what about charity payments and calculating adjusted and threshold income for pension payments .............

why is nothing simples

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: Adjusted Net Income & Employer Pension Contributions

Postby Lambs » Tue Apr 07, 2020 11:54 am

R,

Remember that you are not allowed to claim any deduction for contributions to the Policemen's Annual Ball - ITTOIA 2007 s 58(1) Step 4

Regards,

Lambs


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