Salary Sacrifice - how does it affect 'take-home' pay (2024)

kidmugsy Posts: 12,709 Forumite

29 July 2014 at 10:13PM

You lose £400 less the 42% tax and employee's national insurance (assuming that all £400 would have been in the 40% tax band) i.e. £232. Your pension receives £400 plus any part of the employer's savings on national insurance that he's agreed to put in.

You might also gain on taxpayer-funded handouts to do with children - I'm much too old to have kept my eye on that.

kangoora Posts: 1,193 Forumite

29 July 2014 at 10:37PM

Thanks for the quick reply.

Ahh, I thought it worked the other way around - I'd assumed (before actually asking) that I'd lose £400 but get £400+42% into the pension fund.

So if I've calculated I've got £400 'spare' cash in my monthly wage in order to be £400 less in my pay I'd need to salary sacrifice circa £700/month (and it to all be in the 40% bracket).

Interesting, I've just checked on the .gov site and the higher rate bracket starts at £32k, that seems to give me a lot of leeway to salary sacrifice (if I can afford it ) - current total wage (incl. bonus and car allowance) of almost £60k

Your_Hero Posts: 883 Forumite

29 July 2014 at 11:00PM

kangoora wrote: »

Thanks for the quick reply.

Ahh, I thought it worked the other way around - I'd assumed (before actually asking) that I'd lose £400 but get £400+42% into the pension fund.

So if I've calculated I've got £400 'spare' cash in my monthly wage in order to be £400 less in my pay I'd need to salary sacrifice circa £700/month (and it to all be in the 40% bracket).

Interesting, I've just checked on the .gov site and the higher rate bracket starts at £32k, that seems to give me a lot of leeway to salary sacrifice (if I can afford it ) - current total wage (incl. bonus and car allowance) of almost £60k

If you want the whole £400 net to go in, it's £400 / 0.58 = £689.65 gross.

The employer will save NIC of 13.8% of this figure, i.e. £95 per month. They may pass some of this saving to you too (into your pension pot).

kidmugsy Posts: 12,709 Forumite

29 July 2014 at 11:07PM

kangoora wrote: »

Interesting, I've just checked on the .gov site and the higher rate bracket starts at £32k

Noooooo! It's confusing, but the £32k is the width of the 20% band. You also have to add on the personal allowance, currently £10k, to get the starting point for 40% tax. So it's (just shy of) £42k.

kangoora Posts: 1,193 Forumite

30 July 2014 at 12:30AM

kidmugsy wrote: »

Noooooo! It's confusing, but the £32k is the width of the 20% band. You also have to add on the personal allowance, currently £10k, to get the starting point for 40% tax. So it's (just shy of) £42k.

D'oh! Thanks, looks like I don't have as much room as I thought then Still, I guess, on my income I can play with up to £18k to stay in the 40% bracket

Every time I get an answer it just seems to spawn another question however, well, five in this case

For years I've been putting in 7% of salary and maxed employer contributions of 9% (16% total) - about £7,800 p.a. going into pension pot.

I've got about £400 'spare' cash at the end of each month at this time (hence the question), this time next year it should increase to around £700 'spare'. I'll probably also have around another £300 to invest that I'd like to keep in some form of ISA as 'ready' cash.

Q1. I assume I subtract my current £8k p.a. pension contributions - or do I just subtract my personal contributions (around £280/month) for the purposes of reducing my taxable salary? Then I'd need to subtract £689 x 12 because after salary sacrifice I'd be 'earning' that much less?

Q2. Given that the government are kind enough to give me 42% 'extra' (plus maybe some extra from the company) is it a bit of a no-brainer to use this to pump up my pension pot as my primary method of saving for retirement?

Q3. Is salary sacrifice only really cost-effective as long as it remains in the 40% tax bracket?

Q4. I'm assuming I need to stay in the 40% bracket to keep my full 40% relief on all my pension contribution?

Q5. I guess I need to leave some slack and not go right down to close to £42k (if I can even manage that) just in case I get a poor bonus one year (normally circa 10% of base salary).

Cheers - been very helpful and illuminating so far - off to bed now

30 July 2014 at 5:56AM edited 30 July 2014 at 9:05AM

Q3.

Salary sacrifice is least effective in the 40% and 45% tax brackets and most effective in the 20% tax bracket. The reason for this is the NI rates that the salary sacrifice saves.

Up to the NI "upper earnings limit" the employee NI rate is 12%. Above that it is 2%. The UEL is currently £41,865 a year if income is taken evenly throughout the year. It's deliberate policy of the current government to keep the UEL and higher rate income tax point at the same or close to same level.

What happens below the UEL/higher rate threshold is that salary sacrifice saves 20% income tax and 12% employee NI for a total saving of 32%.

What happens in the 40% income tax band is a saving of 40% income tax and 2% employee NI for a total saving of 42%.

For higher rate tax payers one big advantage is that you get the tax relief immediately and automatically when using salary sacrifice, no need to contact HMRC at all.

The maximum gain for salary sacrifice is a person who has non-work income that they would pay higher rate income tax on but only gets enough from the job to be within the UEL there. In this case they get higher rate income tax saving and basic rate NI saving for total tax relief of 52%. Or even 57% if they are a top rate income tax payer.

30 July 2014 at 6:04AM edited 30 July 2014 at 6:09AM

Q1 no. Your taxable salary is reduced by the amount of your salary sacrifice. Nothing else. You do not report that to HMRC. You report the grossed-up personal pension contributions to HMRC, that is, what you pay in plus the 25% that the pension firm adds to give you the 20% basic rate tax relief on it. No harm to tell HMRC your net as well. HMRC will then increase your basic rate tax band by this amount so that you do not pay higher rate income tax on it, thus avoiding unnecessary higher rate income tax deduction from your pay. You can tell HMRC about these personal pension contributions at any time and ask them to adjust your tax code even for the current year to allow for expected contributions.

You don't tell HMRC about the salary sacrifice pension contributions because salary sacrifice already automatically causes you to get your full tax relief.

30 July 2014 at 6:08AM

Q2. Yes, even without salary sacrifice pensions provide more income per Pound paid in than non-pension options. You do need to consider that pension money is only available at age 55, to change to 57 around 15 years from now. If you want to retire younger than this you'll need some non-pension money to bridge the time gap between retiring and being able to get at pension money.

Q4 yes.

Q5. See my answer to Q3. It really depends on your objective. A lot of people want to use all of their higher rat tax bracket and keep the maximum amount of basic rate income. What I don't understand is why you are making contributions into a personal pension when you have a salary sacrifice scheme available. You don't get the NI saving on the non-work personal pension so why are you using it?

FatherAbraham Posts: 1,024 Forumite

30 July 2014 at 6:31AM

kangoora wrote: »

For example, if I elect to salary sacrifice £400/month does that mean my wage at the end of a month would be £400 less? Or some other amount?

Less than what situation?

If you're asking "will my take-home be less than if I don't pay the £400 at all?", then the answer is "yes", that your take-home pay will go down (but not by as much as £400).

If you're asking "will my take-home be less than if I pay £320 from net salary (making a gross contribution to a pension fund of £400)?", then the answer is "no", because your take-home pay will rise by the amount of National Insurance which would've been paid (and, because you're a 40% tax payer, by 20% of amount of the contribution which falls into your 40% band).

Warmest regards,
FA

Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...

THE WAY TO WEALTH, Benjamin Franklin, 1758 AD

kangoora Posts: 1,193 Forumite

30 July 2014 at 8:26AM

@FA thanks, we've calculated (and tried out properly) that out of my net pay we don't really 'need' £400/month. It's now been explained to me that to reduce my 'take-home' pay by £400 I'd need to salary sacrifice £689.

@Jamesd re. Q1 answer - Cheers, having looked at my pension statement recently from Standard Life this seems to have brought up another question that really worries me but I'll put it in another thread as it's not to do with salary sacrifice.

@Jamesd re. Q2 answer - Chance would be a fine thing to retire before 55 I'm hoping for a retirement age of 58 (52 currently) but considering holding off drawing any pensions until 60 so no adjustments. Wife will continue working for a few more years after I hit 58. Should have some other investments also. If necessary will continue to 60 but really don't want to do that

@Jamesd re. Q3 answer - I take your point that salary sacrifice for a basic rate taxpayer is more efficient than for a 40% taxpayer as they pay 12% less rather than 2%. Thanks, something to think of when I retire as my wife intends to carry on working for a few years (she is a basic rate taxpayer).

@Jamesd re. Q4 answer - Ta

@Jamesd re. Q5 answer - Yes, at the moment, £400 net is what I have to play with but next year when I finish my mortgage I could have as much as another £600 net. I'm considering going down to maximum of basic rate income being paid and seem to have worked out that this will also be very close to the maximum I can save anyway (£400 now + a further £300) - leaving circa £300/month to put into more liquid investments.

Maybe I wasn't clear, or wrote it wrong, my current pension is a company one into which I contribute 7% of salary to get a maximum employer contribution of 9% - total of 16% of gross salary per month going into my pension pot. That's part of the other potential issue mentioned above, or maybe I'm just reading my pension statement from SL wrong

Thanks again all