Author Topic: Moving employer pension to salary sacrifice? Any advice?  (Read 1172 times)

Poozay

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Moving employer pension to salary sacrifice? Any advice?
« on: September 04, 2018, 09:20:56 AM »
Anyone have any experience of moving to a salary sacrifice scheme?
My employer has sent out a letter to move me into this type of scheme as it saves me and the employer NI contributions, therefore supposedly increasing my take home pay but reducing my contractual salary (i.e - if i earnt £30,000 a year it would be contractually reduced to 28,500).... that is all i understand of it.

Anyone have any experience and recommendations?
« Last Edit: September 04, 2018, 09:47:11 AM by Poozay »

AnswerIs42

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #1 on: September 04, 2018, 02:09:03 PM »
Go for it. Salary sacrifice is awesome.

Are you a higher rate taxpayer? If so then the benefits aren't quite as good, but there is a hacky workaround you might be able to do in order to get both 40% tax relief and 12% NI relief on some of the money. I'm doing it myself this year, I was going to create a thread about it but haven't got round to it yet.

SupersavingMMM

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #2 on: September 04, 2018, 02:45:14 PM »
I requested it at work (through a forum thing we have going) and the reply was ‘we will consider it on next review’.  In reality, 80% of the workforce will barely give it a thought, much less consider it - but I know a few canny ones, higher up the pay scales would definitely both benefit and probably go for it so I have my fingers crossed it becomes an option for me at some point.

I would be very interested to see the finer details of this in practice. If any people are doing it so.......

PTF!

UK Dancer

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #3 on: September 05, 2018, 02:09:18 AM »
Long story short, it's fantastic.

The principle is that you choose a %age of your salary to sacrifice and then all calculations based on your base salary as far as tax is concerned use this new base salary as the starting point. So you pay less PAYE, NI, student loan if you have one. Note that I specify as far as tax is concerned, your employer should however still be using your gross salary as the basis for all pay rise calculations, so there's literally no way you lose out here, other than the fact you get less cash in your pocket right now. You get more net worth overall, it goes direct to a pension pot and, really helpfully for a lot of people (and I'm hoping for me in the next few years), you can use your SS contributions to keep you out of the higher-rate tax bracket as the tax brackets are based on your 'adjusted net income' i.e. your income after these SS pension deductions have been made.

I know, for example, another mustachian who has been increasing his SS % every year as he gets pay rises to maintain his salary at about £45k post-SS so he never hits the higher bracket (and also maximising the very generous pension contributions from his employer). It means there's a potential he's going to fall foul of the £40k max annual contribution to a pension in the future, but like all good mustachians he's aiming to have retired by then and therefore will not need to worry about it!

In the UK your employer is also almost certainly legally bound to contribute due to the auto-enrolment scheme (details here: https://www.gov.uk/employers-workplace-pensions-rules) which means that not only are you getting to put a gross salary amount in and therefore not paying any tax on that amount, but your employer is ALSO putting into it and that's not being taxed either! This is how, on a few occasions in the last year, I've managed to make it to savings rates over 100% (I base my savings calcs on take home pay) as we've spent a smaller amount on our monthly bills than my company is contributing to my SS pension...

Poozay

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #4 on: September 05, 2018, 12:55:00 PM »
You guys are awesome, very much appreciated! :D

PhilB

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #5 on: September 06, 2018, 03:37:11 AM »
If you do earn over the HRT limit the 'hack' Answeris42 mentions is great, but generally relies on your payroll dept being able to cope with changing your pension contributions fairly frequently which not all employers can cope with.
Is your employer sharing any of their NI savings with you, or trousering the lot themselves?

AnswerIs42

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #6 on: September 06, 2018, 10:40:43 AM »
More on that salary sacrifice hack:

National insurance is reduced from 12% to 2% at the same point that income tax goes up from 20% to 40%. However, income tax is calculated on an annual basis, and NI is calculated on a monthly basis. So, if instead of spreading your salary sacrifice contributions evenly over the whole year, you compress them into a few months instead (although you need to make sure you don't go below minimum wage), then some of your contributions will take you down into the 12% NI band again for that month.

Problem is, often employers only let you change your contribution levels once a year at the beginning of the tax year. This is unfortunately the case for my employer. However - in my case (similar to the OP) they have introduced SalSac part-way though the tax year, and let me change my contribution level just before this happened. This gives me a one-off opportunity to spread almost all my pension contributions for the year over 8 months rather than 12, which means I effectively get 52% relief on nearly a third of the money.

Shame they're not sharing the employer NI saving with me, that would be even better.

PhilB

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #7 on: September 07, 2018, 01:18:39 AM »
My employer passes on 6% out of their 13.8% NI saving claiming the difference pays for the additional administration.  Good news is I get to change every month, bad news is the cash equivalent for not taking a company car isn't included in the minimum wage calculation limiting how much of the 12% band I can access.
You can manage with a rule of 'one change per tax year', but not if it's a fixed date -  eg if you wanted 3 months per tax year at minimum wage then you could change to min wage at 1 Jan then back to low pension contributions from 1 July,

cerat0n1a

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #8 on: September 07, 2018, 02:28:13 AM »
Problem is, often employers only let you change your contribution levels once a year at the beginning of the tax year. This is unfortunately the case for my employer.

HMRC used to enforce this - you had a once a year window to change contribution levels. Otherwise you could only do so when there was a "lifestyle event" - which could mean birth of a child, divorce, moving house, illness etc. This was specifically to avoid this kind of thing. Last year or 2, they seem to have got more relaxed about allowing more frequent changes, but I suspect any blatant NI avoiding shenanigans would be stomped on pretty quickly.

PhilB

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #9 on: September 07, 2018, 04:12:49 AM »
Problem is, often employers only let you change your contribution levels once a year at the beginning of the tax year. This is unfortunately the case for my employer.

HMRC used to enforce this - you had a once a year window to change contribution levels. Otherwise you could only do so when there was a "lifestyle event" - which could mean birth of a child, divorce, moving house, illness etc. This was specifically to avoid this kind of thing. Last year or 2, they seem to have got more relaxed about allowing more frequent changes, but I suspect any blatant NI avoiding shenanigans would be stomped on pretty quickly.
Those restrictions are still in place for every other benefit, but for pensions they were found to conflict with auto-enrolment legislation so that's currently a free for all.  I should be able to adjust some other things too from 1 November though as moving to 6 day weekends counts as a lifestyle event! :o)

londonstache

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Re: Moving employer pension to salary sacrifice? Any advice?
« Reply #10 on: September 10, 2018, 07:26:57 AM »
Long story short, it's fantastic.

I know, for example, another mustachian who has been increasing his SS % every year as he gets pay rises to maintain his salary at about £45k post-SS so he never hits the higher bracket (and also maximising the very generous pension contributions from his employer). It means there's a potential he's going to fall foul of the £40k max annual contribution to a pension in the future, but like all good mustachians he's aiming to have retired by then and therefore will not need to worry about it!

Quote
This is how, on a few occasions in the last year, I've managed to make it to savings rates over 100% (I base my savings calcs on take home pay) as we've spent a smaller amount on our monthly bills than my company is contributing to my SS pension...

I'm doing exactly this and highly recommend if possible/suitable for you. I'm not quite at the brilliant level above, but it brings my effective saving rate to >70%, which results in a pleasingly short remaining time pre-FI. In practice it's a little longer than the 7-ish years suggested by MMM as parts of it (notably pension & LISA) have lock-out periods before I can access them, but nice to be making some solid progress.

As others have said, bite their hand off.