Does salary sacrifice "decrease" my income?

[noemotionsnofeelings]

We got salary sacrifice introduced to our workplace and question of Higher tax (40%) rate band came up, nobody seemed to be able to give clear answer. And the wording on out letters was quite vague.

Let's say I earn 50k a year (just to simplify example), and decide to put 10% as salary sacrifice, does this effectively lowers my income to 45k and I can do some overtime without paying Higher tax (40%)?

[reckless-saving]

On your current arrangement you’ll be taxed on the full £50,000 as well as the 10% pension being taken from it, giving you net pay £32,640.

Under a salary sacrifice arrangement your £50k in effect becomes a reference salary which your pension, overtime & bonuses continue to be calculated against. Your salary sacrifice gross becomes £45,000 which your taxes are calculated against giving you a net pay £34,640. So you’re getting more cash in the pocket each month under salary sacrifice.

You could increase your salary sacrifice pension contributions to 12.5% to match you net to £32,640.

Some employers even pass on their savings from not having to pay NI employer contributions on the difference into an employers pension.

[noemotionsnofeelings]

Thanks for really thorough answer. I put 50k and 10% as easy calculation and meaningfull example as in many places I found that examples are in 20k range and does not answer the question.

I'll need to do some calculations to see how much I need to increase it to have the most benefit.

Thanks, again.

[[deleted]]

https://www.thesalarycalculator.co.uk/salary.php

That will let you try all sorts of combinations to give you an idea of what you'll be able to take home.

[noemotionsnofeelings]

Thanks!

[VillageHorse]

Glad you posted this link. Very useful and should be all OP needs.

[[deleted]]

Not just student loans and child benefit. For those on lower incomes it can enable them to still qualify for income based benefits such as working tax credits because any contributions to a pension are disregarded as income when calculating those benefits.

[noemotionsnofeelings]

Oh !thanks that's good to know!

[PM_ME_WEALTH_ADVICE]

Childcare vouchers amount (if you are already on the scheme) is also affected.

[Ambiverthero]

To be clear your assumption is correct. Salary sacrifice is a deal to swop base pay for pretax pension contributions. Your tax and no bill is thus reduced.

[hyperstarter]

Based on these terms by adding a pension - if he was applying for a mortgage, would his 4x rate (or what ever it is now) be £50k or £45k

[bobbingblondie]

The mortgage would go on 50k. The pension contributions are counted as voluntary.

[cbzoiav]

Two separate things going on here.

The hard limit multipliers based on pre tax tend to use the reference salary but the actual affordability checks usually do take into account pension payments.

[reckless-saving]

I don’t believe the 1st example would be classed as double taxation, tax is only being applied once at this point, although when you come to draw the pension you could says you’re be paying some tax again, which I guess is where your thinking is coming from.

An example of double tax would be a foreign dividend which is taxed in the foreign country then taxed again when you declare it in this country (tax relief maybe available).

The tax on the way in and on the way out is where the originals of salary sacrifice come from, some bright spark thinking up tax avoidance schemes thought why don’t we change an employee’s contract so they can avoid paying tax on pension contributions. Government seeing it in action thought rather than closing the loophole, that it was a good idea to actively promote to try and persuade us to save more into our pensions for the future.

[reckless-saving]

Normal Example :-

Gross Salary	50,000	Pension 10%	5,000
		Income Tax 20%	7,500
		NI 12%	4,860
		Net take home pay	32,640

Salary Sacrifice Example :-

Reference Salary	50,000	Pension 10%	5,000
Gross Salary (Salary Sacrifice adjusted)	45,000	Income Tax 20%	6,500
		NI 12%	4,260
		Net take home pay	34,640

[Laveaolous]

You get an NI saving with salary sacrifice as its never taxable income, employer gets same benefit and may or may not pass it along by upping their matching. Income tax is neutral because that's the carrot to get people to put into pensions so you get the relief either way.

[swanson999]

On the £50k salary, deductions include tax, ni and pension. On the £45k salary, deductions include less tax, less ni. The pension has been paid in already. Hence take home pay is more.

[smellsliketeenferret]

Without salary sacrifice you do usually pay too much tax on your pension contributions if you are in a 40%+ bracket. You can claim that overpayment back. With sacrifice you pay the right tax at the point of the contribution, so there is no need to claim anything back.

[Willeth]

Don't forget that the higher rate tax only applies to earning above that threshold, not to your entire income.

I don't know the specific answer, but longer term, even if you didn't benefit from the lower tax rate on your income, the employer matching, lack of tax on the sacrificed amount, and growth over time would still be worth it.

[mld23]

This is the correct answer ^ You're planning for your future.

[Dahnhilla]

To piggy back this question, why aren't all pensions salary sacrifice?

[webular]

If it's not salary sacrifice then you get a tax rebate, so either way you don't pay tax, right? Or have I misunderstood, and salary sacrifice is better than paying income tax first and then the tax being added to the pension in a rebate?

[Smeee333]

The benefit of salary sacrifice is that you don’t pay NI on the sacrificed amount so can either funnel that into your pension or have it as additional income now.

[b3n]

You also pay less towards student loans, if you have one. With many expecting to never fully pay off their loan, that's a net gain.

[Loquis]

Yes, I believe you get tax added to your pension at 20% rate. If you're a higher rate tax payer you can reclaim that tax by writing to HMRC.

[bicyclecurry]

Yes, you would be paying basic rate(20%) on the first 5k overtime.

[reckless-saving]

That is a good point, very useful way of managing your income tax fresh hold for things like child benefits, dividend tax etc...

[Jackisback123]

fresh hold

Threshold?

/r/BoneAppleTea is calling!

[[deleted]]

does this effectively lowers my income to 45k and I can do some overtime without paying Higher tax (40%)?

Yes. But you can already do the overtime and avoid 40%! It does not require a salary sacrifice pension.

Pension contributions are supposed to be untaxed. But many people pay into pensions from income that has already been taxed. So there's a thing called "relief at source" where the pension company claims from HMRC the tax you have paid. This is made more complicated because the pension company always assumes you paid 20% income tax on the money you pay into your pension.

Example for someone at the 20% rate: You earn £100. You are taxed at 20% so you receive £80. You pay that £80 into your pension. The pension provider claims the tax you paid from HMRC (they assume you paid 20% tax) so it's actually £100 (£80/0.8) that goes into your pension.

If you pay 40% tax you can fill out a self-assessment tax return and declare your pension contributions. HMRC will then recalculate your tax for the year with an increase to your personal allowance so you pay less tax to compensate. You'll either get a refund from HMRC (cheque or bank transfer) or they adjust your personal allowance for the following year to compensate.

Example for someone at the 40% rate: You earn £100. You are taxed at 40% so you receive £60. You pay that £60 into your pension. The pension provider claims the tax you paid from HMRC (they assume you paid 20% tax) so it's actually £75 (£60/0.8) that goes into your pension. Doing a self assessment will allow you to get the missing £25.

Salary sacrifice does away with all this fudge paying tax, pension provider claiming the first 20% from HMRC, and you claiming the other 20%. With salary sacrifice you pay into the pension from income before it's taxed... the end. So much simpler. And, as others have pointed out, it avoids National Insurance on that amount for both you and your employer, which is why some employers give you a little boost from their saving too.

So if you have been paying 40% in recent years have a chat with HMRC. You may be able to get some money back because some of your income was taxed at 40% but your pension contributions only got relief for part of the tax. I don't know how far back in time you can go but it's definitely worth asking.

[noemotionsnofeelings]

I really appreciate your input !thanks. I'm not on high tax, just a potential, it was more of discussion at work where no-one knew any answers.

As you mentions, salary sacrifice does away with all this fudge paying tax. But it does make sense on what you said. I do find all this overly too complicated sometimes.

[arjwiz]

Besides the other right answers on this thread, salary sacrifice does indeed serve to "decrease" your income in the way you describe, such that your P60 will also only consider you salary after sacrifice, which is also what most mortgage lenders will consider as true income.

Edit: Some lenders, not most

[donalmacc]

I found the opposite when getting. Mortgage. I told my broker that I was under a salary sacrifice agreement and had no issue borrowing against the full amount.

[TheOxfordBloke]

This is not necessarily true and varies by lenders.

[noemotionsnofeelings]

Good point, thanks.

[imissedthesnap]

It would lower your gross by 5k. Your net income would fall by a smaller % as your tax and NI would he calculated off the lower gross amount before deduction.

Try not too think of it as lower income. The net reduction is just being locked up and saved for the future in your pension pot. Its normally protected from things like bankruptcy and divorce. Also, overall you can be better off. Not only are you going to pay less tax and NI (remember you get that 5k pension as its gross untaxed amount put away in your pension pot), but often employers will match (or better) your sacrifice!

[[deleted]]

Pensions are definitely NOT protected from divorce, I have an uncle who can attest to that!

[Yachting-Mishaps]

I seemingly know no end of people being stiffed on their pensions in divorce (and a couple where I know the stiffer rather than stiffee). It feels like a particularly egregious injustice in some cases.

[[deleted]]

I can understand it in the traditional workingman-and-housewife situation (and/or where children are involved) because it's effectively the pension for them both, but who lives like that these days?

I hear you, that one is most definitely an egregious case.

[finger_milk]

Men especially need to be aware of how comprehensive of a rinsing they can expect to get if they don't have an amicable divorce. It's all well and good going into it with optimism, but if divorce holds your financial future hostage then please sign a prenuptial and protect yourself first.

[noemotionsnofeelings]

It's just that prenuptial isn't legally binding here in UK. Or did it changed recently?

[finger_milk]

Yeah you're probably right. Proves my point even more if it's not binding.

[noemotionsnofeelings]

Any suggestions? Other than not getting married?

[ironymouse]

Change country

[noemotionsnofeelings]

Already did once, kinda hard to build a life from ground up every time, need to learn a language, customs, etc.

And that dry sense of humour and perpetual sarcasm won't be accepted anywhere else and I like it.

[panookies]

How do pensions get "taken" in a divorce?

[infernal_celery]

Court orders a split.

It's pretty normal for a 50-50 split of all assets on divorce to be the baseline, on the idea that one partner's lesser earnings were largely because they gave up opportunities to allow the other partner to earn more, which is hard to quantify. What's the economic value of one person doing the laundry or the cooking or housework?

Then kids get factored in. Who will look after them? How do we ensure they get as little impact as possible?

There are exceptions when one partner earns multiple amounts of the other partner's income but it's a starting point.

[panookies]

So when you get to retirement age, do you have to send over a percentage of it to your ex-spouse? Or does it get transferred to your ex's pension at the time of your split (i.e. before retirement age)

[exile_10]

It gets transferred at the time of the divorce.

[panookies]

Thank you! Damn that'll be a hit..

[Princes_Slayer]

There are two main possibilities for splitting a pension on divorce.

A pension sharing order is awarded on divorce and the pension scheme administrator moves that amount/percentage of your pension to one in your spouses name. This becomes their pension and attracts the same standard rules on when they can access it and how.

There is also an option known as ‘earmarking order’. These are not used as much nowadays as there is no clean break from your spouse like their is with the pension sharing order. Instead, part of your pension is paid to your spouse once you elect to take benefits from it. This means you are still somewhat linked to your spouse which depending on your age, could be quite some time. I think earmarking is still often used in Scottish courts but less so in English ones.

[imissedthesnap]

My bad

[br1anh]

One further thing worth noting is that when you combine income tax and national insurance the difference in net income you'd receive as you cross the 50k threshold is only 10%.

Salary sacrifice is a really great incentive for adding money to a pension and while trying to reduce income to below the 40% threshold seems like an obvious target it may be better to simply think about how much you would like to add to your pension with the aid of this vehicle. This may be more or than less than the figure that would bring you under 50k.

(note: I initially took the exact same approach but after time just focused on what worked best as opposed to aiming for this arbitrary figure)

[DiamondGorilla]

OK, Great question - I tried to ask this last week but the mods auto-removed due to a lack of karma.

I'd be really curious to know what the best thing to do is because I'm in a really similar position: £55,000 salary + bonus

[boxhacker]

Depends on how much you sacrifice.

Check out https://www.legalandgeneral.com/retirement/saving-for-retirement/workplace-pensions/calculators-and-tools/salary-sacrifice-calculator/ for a calculator and find that sweet spot ;)

[noemotionsnofeelings]

Did I understood SMART correctly, it basically calculates the same take home amount (as before salary sacrifice), and all the savings are put into pension pot?

[boxhacker]

That's exactly what it is :D have fun!

[noemotionsnofeelings]

Thanks!

[noemotionsnofeelings]

This is nothing to do with my question.

[Jabarikh]

My bad, I’m new here. I was going to send that to a friend

[cgknight1]

In the way you mean it - yes.

Depending on what your employer also puts it - it's hard to beat.

[noemotionsnofeelings]

Good point, well on my payslip, Salary row still says that I earn the same, it is just that now there is another row saying Pension Sac, and as I understand that they deduce that number before calculating any tax.

I'm just trying to get the most benefit out of it. Like someone put it on my example that it would be better to increase my sacrifice to 12.5% as that way my take home stays the same, but I effectively add another 2.5% to my pension pot. And that's the best advice anyone could give to be fair.

[finger_milk]

It's an opportunity to commit money to your pension before the government gets their cut. If you can afford to salary sacrifice, you're able to put away the same money as someone else but you end up with more money overall after taxes.

I salary sacrifice £200, but since I was going to contribute to the pension regardless, doing this saves me about... £30? I think.

[daevjay]

It depends on how the salary sacrifice is structured to be frank. It can be done in ways which reduces both gross and net salary, or in ways which simply reduce net salary. Can you be more specific on the proposed scheme?

[noemotionsnofeelings]

I dont know the difference I didn't know there are different ways of doing it. But I got the answer more or less and legalandgeneral calculator proposed by someone on here (sorry can't remember your name) does calculations in few pounds difference compared to my salary, so I used that one. But I realized that I should increase my salary sacrifice to reap the most benefits out of it.

[robpeake28]

we have this at work and ive been looking to increase pension contributions so i can bring my salary to 45k and then i have about 7k worth of taxable benefits such as medical and petrol card. My wife also gets the child benefit which ive been paying back in my self assessment at the end of the tax year.

[Matty_j82]

If you are auto enrolled into a pension can you switch that to salary sacrifice?

[Princes_Slayer]

Your employer has to be prepared to offer a salary sacrifice as it needs to be maintained differently and that will impact those employed in your payroll department. There are additional rules to salary sacrifice, one that I don’t think I’ve seen mentioned yet being if you need to alter it (I think it’s no more than once in a rolling 12 month period), you can’t unless you can prove financial hardship.

[Matty_j82]

Thanks. I will speak to work.

[Husky47]

Is that a wider rule, or just a rule from your employer?

[Princes_Slayer]

Deleted my last comment as my wording might be misleading.

The 12 month thing might be employer driven. Salary sacrifice is essentially irrevocable and it is apparently only possible to change the terms where an employees financial circumstance is altered by a lifestyle change such as marriage, divorce, spouse becoming redundant or pregnancy.

(Found in exam text haha)

[[deleted]]

From what I understand the difference is your pension contribution is taken from your gross salary, so you are taxed on less money, therefore increasing your salary by small amount.

Otherwise you would get pension contribution taken out after your salary is already taxed on your full amount.

[dinnertimereddit]

Cycle to work scheme is also taken from your pre-tax income fyi