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Where Taxpayers and Advisers Meet

Salary sacrifice pension for higher rate tax payer

masteroats
Posts: 27
Joined: Wed Aug 06, 2008 3:48 pm

Salary sacrifice pension for higher rate tax payer

Postby masteroats » Sat Sep 30, 2017 10:00 am

Hi,

I am a higher-rate tax payer pay 10% of my salary into a company pension scheme each month. For that obviously, for every 58p I put into the scheme, I get 20p basic tax relief, 20p 'cash back' (either through adjusted tax code or re-claim) and lose 2p in NI.

My company wants to switch all employees over to salary sacrifice and is promoting the savings and benefits (employer NI savings will not be passed on to us). However, to me it appears a poor option for higher rate tax payers.

By joining, the 20p 'cash back' goes straight into my pension along with the 2p NI. However, if I continue to take it as cash back, I can put it into the pot manually myself and claim income tax relief against it (and the cycle repeats to a smaller amount). Effectively, I can get an extra 10.5p tax back this way by foregoing the original 2p salary sacrifice benefit.

I cannot find any discussions online about this and I can't be the only one to have spotted this, which leads me to believe I've overlooked something important. Can anyone put me straight?

robbob
Posts: 2807
Joined: Wed Aug 06, 2008 4:01 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby robbob » Sat Sep 30, 2017 10:19 am

However, to me it appears a poor option for higher rate tax payers.
Based on the same level of gross contributions into your pension either method is equally tax efficient - so this isn't a poor option as you will save the 2% NI and have the same tax advantage of the other method.


the maths of salary sacrifice is fairly easy

Your employer puts £1 into your pension on your behalf - this being the full a mount invested, as your taxable pay is now £1 less, you will pay 40p less tax than you would have done were (spelling right?) this arrangement not in place and also 2p less Ni putting you at the full pimped up 58p equivalent level cash paid out to get £1 invested.


Comparisons to the other method may sometime get confusing due to the fact you pay in 80p at present as cash have 20p added in by hmrc to make £1 invested and get 20p cashback making the net outlay 60p to get the equivalent sum of £1 invested. Hopefully enough to buy a zip from Mr Rahman when you retire :)

masteroats
Posts: 27
Joined: Wed Aug 06, 2008 3:48 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby masteroats » Sat Sep 30, 2017 11:23 am

Hi Rob,

Thanks for the reply. I don't think I've explained myself properly though.

Imagine the following scenario.

A person with a gross salary of £60k opts into salary sacrifice for 10% of his salary. His monthly figures are as follows:

Pension contribution £500 (10% of £5000)
Net pay £3258 (on new salary of £4500 per month)
Total £3758

Under the reclaim system he could beat that by doing the following:

Basic Net Pay £3548 (on £5k)
Pension contribution 12% £426 (increased to 12% to cover the addition 20% addional tax relief that is no longer going directly into the fund)
Basic pension relief added to pension £147 (20p per 58p invested)
Reclaim tax £147 (20p per 58p invested)

Total pension contribution £573 (£73 more)
Net Pay £3269 (£11 more)
Total £3842 (£84 more)

This happens because the higher rate payer get much more value from addition income tax savings on the 20% reclaim than he does by getting the 2% NI.

robbob
Posts: 2807
Joined: Wed Aug 06, 2008 4:01 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby robbob » Sat Sep 30, 2017 11:59 am

If you are doing your calculations on a true like for like basis - I.e comparing the same amount put into a pension and all amounts put into the pension are being made by you (ie there is no change to employers contributions clouding the issue then you have you calcs wrong unfortunately.

Pension contribution 12% £426 (increased to 12% to cover the addition 20% addional tax relief that is no longer going directly into the fund)
Basic pension relief added to pension £147 (20p per 58p invested)
Reclaim tax £147 (20p per 58p invested)
If you pay £426 into a pension (with added tax relief) you only get added tax relief of 25% of the amount paid in - so amount added to the pension pot here here would only be 106.50.


Here is how calcs work on lfl basis

Pension contribution £500 (10% of £5000)
Net pay £3258 (on new salary of £4500 per month)




Under the reclaim system we have

Basic Net Pay £3548 (on £5k)
Pension contribution made = 80% of £500 to be invested = £400 (note tax relief added of 100 is 25% of 400 paid)
Higher rate tax relief given on £500 invested = £100 tax refund

Net sum left = 3548-400+100 = £3,248

This is £10 worse than the other method - being the 2% NI charged on the 500 extra taxable pay

masteroats
Posts: 27
Joined: Wed Aug 06, 2008 3:48 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby masteroats » Sat Sep 30, 2017 1:09 pm

Hi Rob,

Thanks again for responding. Here I am out of my depth as not a tax specialist.

However, if I can only claim back 25% basic tax relief (I have no reason to doubt this is the case) then the same amount by which the my tax relief reduces, the reclaim amount increases.

So if I lose 40p in tax per pound, my calculations assumed 20p basic tax relief and 20p reclaim. If the tax relief is only 14.5p (25%) then the reclaim amount will be 26.5p and the total figures unaffected.

Thanks

bd6759
Posts: 3094
Joined: Sat Feb 01, 2014 3:26 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby bd6759 » Sat Sep 30, 2017 3:47 pm

25% is the basic rate gross up calculation. This ensures that you get 20% tax relief on your contrubution by way of of an additional contribution to your pension.

If you pay £400 into your pension, the tax relief top up is £100 to give a total contribution of £500. (£500 less 20% tax is £400). You then get an additional £100 tax relief to compensate for the 40% tax you paid on that £500. So, in effect your £%00 contibution only costs you £300.

If you reduce yout salary by £500, you will pay £200 less tax and £10 less NIC. So you will be £10 better off.

masteroats
Posts: 27
Joined: Wed Aug 06, 2008 3:48 pm

Re: Salary sacrifice pension for higher rate tax payer

Postby masteroats » Wed Oct 04, 2017 11:32 am

Hi BD6759 & Rob,

Thanks both for your replies. My error was in level of rebate received. I was working on the understanding that as a higher rate tax payer gets 58p net from 98p earned, if that 58p was invested he would get back 2 x 20p. Obviously its only 2 x 25%.

Its all clear to me now. Thanks again.


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