Salary Exchange Pension Contributions

[d50cyx]

Fairly sure I must have got something wrong with my maths along the way, but thought I'd throw this out, if only to determine where I've gone awry.

Employer is offering access to a pension scheme and allowing contributions via Salary Exchange. Consider the following example (for a higher rate tax payer):

• You Exchange £80 per month from your gross salary (of which you might have taken £46 home after Income tax & NI deductions)
• HMRC adds basic rate tax of £20 (thanks very much - this is tax you're paying on the rest of your salary, despite the saving I've already made above)
• Employer adds the same amount as the Exchange (up to a maximum of 3% gross)
• So, for £46 less in my pocket at the end of the month, my £80 contribution is now £80 + £20 + £80 = £180
• Finally, at the end of the tax year, I complete my tax return and claim back another £20 per month. Bringing the net cost of the £180 contribution down to £26 per month.

This is too good to be true. Isn't it? Or is it a just well kept secret?!?

Cheers.

[GT03ROB]

d50cyx said:

Fairly sure I must have got something wrong with my maths along the way, but thought I'd throw this out, if only to determine where I've gone awry.

Employer is offering access to a pension scheme and allowing contributions via Salary Exchange. Consider the following example (for a higher rate tax payer):

• You Exchange £80 per month from your gross salary (of which you might have taken £46 home after Income tax & NI deductions)
• HMRC adds basic rate tax of £20 (thanks very much - this is tax you're paying on the rest of your salary, despite the saving I've already made above)
• Employer adds the same amount as the Exchange (up to a maximum of 3% gross)
• So, for £46 less in my pocket at the end of the month, my £80 contribution is now £80 + £20 + £80 = £180
• Finally, at the end of the tax year, I complete my tax return and claim back another £20 per month. Bringing the net cost of the £180 contribution down to £26 per month.

This is too good to be true. Isn't it? Or is it a just well kept secret?!?

Cheers.

I think maybe you have misunderstood the scheme. Normally it works as follows :

* You chip in £100 of gross salary (you would normally only see £60 of it as a 40% taxpayer)
* Employer matches your gross contribution so thats £100
* So for £60 less in your pocket you now have £200 in a pension

Not quite as good but it's a decent deal if your employer matches.

[PurpleMoonlight]

d50cyx said:

* You Exchange £80 per month from your gross salary (of which you might have taken £46 home after Income tax & NI deductions)

• HMRC adds basic rate tax of £20 (thanks very much - this is tax you're paying on the rest of your salary, despite the saving I've already made above)
• Employer adds the same amount as the Exchange (up to a maximum of 3% gross)
• So, for £46 less in my pocket at the end of the month, my £80 contribution is now £80 + £20 + £80 = £180
• Finally, at the end of the tax year, I complete my tax return and claim back another £20 per month. Bringing the net cost of the £180 contribution down to £26 per month.

I think you have got a bit confused there. Assuming the contributiuons are going to a personal pension it will work like this:

1. You pay £80 from your net pay. Note no NI saving.
2. Government immediately add £20 for basic rate tax relief. The PP provider claims this.
3. Employer contribution added.
4. At end of the tax year you claim an additional £20 tax relief via your tax return which HMRC pay to you personally.

[d50cyx]

Ah, so no additional nuggets of tax. Which makes a lot more sense to me, while contradicting the information I've been given by HR. Ho hum.

(presumably there's also an NI saving as well?)

Cheers.

[PurpleMoonlight]

The only way to save NI is if the employer operates a salary sacrifice arrangement, but that would not involve basic rate tax relief being added to the personal pension or claiming anything via your tax return, so it doesn't look like they are offering that.

[d50cyx]

Employer is operating an option of salary sacrifice (aka. Salary Exchange, by them at least!), but HR are also claiming you get basic rate tax applied to your contribution (not true) and are able to claim higher rate tax via tax return (also not true).

Thanks for putting me right, my real mistake was to believe anything HR said...

Cheers.

[-Pete-]

GT03ROB said:

d50cyx said:

Fairly sure I must have got something wrong with my maths along the way, but thought I'd throw this out, if only to determine where I've gone awry.

Employer is offering access to a pension scheme and allowing contributions via Salary Exchange. Consider the following example (for a higher rate tax payer):

• You Exchange £80 per month from your gross salary (of which you might have taken £46 home after Income tax & NI deductions)
• HMRC adds basic rate tax of £20 (thanks very much - this is tax you're paying on the rest of your salary, despite the saving I've already made above)
• Employer adds the same amount as the Exchange (up to a maximum of 3% gross)
• So, for £46 less in my pocket at the end of the month, my £80 contribution is now £80 + £20 + £80 = £180
• Finally, at the end of the tax year, I complete my tax return and claim back another £20 per month. Bringing the net cost of the £180 contribution down to £26 per month.

This is too good to be true. Isn't it? Or is it a just well kept secret?!?

Cheers.

I think maybe you have misunderstood the scheme. Normally it works as follows :

* You chip in £100 of gross salary (you would normally only see £60 of it as a 40% taxpayer)
* Employer matches your gross contribution so thats £100
* So for £60 less in your pocket you now have £200 in a pension

Not quite as good but it's a decent deal if your employer matches.

Our scheme is like this. Sacrifice £100 gross (£60 take-home) and my employer matches it (up to a certain maximum) and also adds the employer NI contribution which they no longer need to pay. So more than £200 goes into my pension. I understand your mistrust of HR, but this has to be one of the best things they've ever done for me, I may even be able to retire one day!

[Zigster]

d50cyx said:

Employer is operating an option of salary sacrifice (aka. Salary Exchange, by them at least!), but HR are also claiming you get basic rate tax applied to your contribution (not true) and are able to claim higher rate tax via tax return (also not true).

Thanks for putting me right, my real mistake was to believe anything HR said...

Cheers.

If it's called salary exchange then it certainly sounds like a salary sacrifice arrangment. Salary sacrifice is an NI "efficient" way of paying pension contributions.

Say you earn £100k pa and pay 5% (£5k) into your pension as an employee contribution. This contribution only costs you £3,000 net (i.e. 60% of £5k). However, you have still paid 2% NI on that contribution and your employer has paid 13.8% - a total of £790.

If your employer then sets up a salary sacrifice arrangement which you join, you agree to a lower salary (£95k pa) and the employer pays the £5k contribution direct to your pension scheme as an employer contribution rather than an employee contribution. There is no employer nor employee NI on that. So you save £100 (2% x £5k) and your employer saves £690. Many employers pass some of that NI saving to the employee by increasing the contribution - my last employer upped contributions by 10% (of the contribution) but my current employer only ups it by 5%. So, for a pension contribution which costs you £2,900k you get up to £5,690 in your pension.

Your employer will often pay additional contributions to your pension (say match the 5% you pay) but these are not subject to NI. Employer contributions (almost) definitely make it worthwhile joining the employer's pension scheme.

It does sound as if your HR department are confused. Employer contributions are paid gross - there wouldn't be any further tax relief claimed as you've received it all at source.

(And apologies to all if I've got my maths wrong there or said something which doesn't sound right - happy to be corrected.)