UK Relevant Earnings & Salary Sacrifice
Discussion
My understanding of Salary Sacrifice (or Exchange) is that the individual exchanges part of their salary for a ‘non-cash’ benefit which is commonly a bigger Company Pension contribution.
Consequently, a member of a group scheme would not make any ‘personal’ contribution into their pension, but their employer will make the contribution which will generally be equivalent to whatever %age of their former salary that they agreed to exchange plus an amount equivalent to what their employer would have previously contributed, plus some of the ER NIC avoided (if they are lucky).
This has one major advantage in that as far as HMRC are concerned the member has not paid anything personally into their scheme (it was 100% employer funded).
This means that funds permitting, the member is free to make a personal contribution into a SIPP up to £40k if supported by UK Relevant Earnings, and possibly more if
UK Relevant Earnings are higher and the excess can be covered by unused Annual Allowance carried forward.
My question therefore is whether or not the amount of salary exchanged/sacrificed is excluded from the determination of UK Relevant Earnings?
This would appear to make sense as no tax would have been paid on the value exchanged so why should it count towards the value that could be paid into pension attracting automatic Relief At Source of 25%.
Take this example (ignore NIC):
Total remuneration paid by Co. £70k
£30k is tax free severance pay (excluded from UK RE as untaxed)
£20k paid into Group Scheme under Salary Sacrifice.
Is UK Relevant Earnings in the above case £40k (£70k - £30k), or £20k (after the un-taxed pension contribution is excluded)?
If UK RE is £40k, the member could contribute £32k into their SIPP and obtain £8k of RAS.
If UK RE is £20k, the max. personal contribution should be £16k with £4K of RAS.
In both cases, the total paid into both schemes would exceed £40k in total but as the company contribution is irrelevant, there is no need to consider tapping into available c/f AA.
Consequently, a member of a group scheme would not make any ‘personal’ contribution into their pension, but their employer will make the contribution which will generally be equivalent to whatever %age of their former salary that they agreed to exchange plus an amount equivalent to what their employer would have previously contributed, plus some of the ER NIC avoided (if they are lucky).
This has one major advantage in that as far as HMRC are concerned the member has not paid anything personally into their scheme (it was 100% employer funded).
This means that funds permitting, the member is free to make a personal contribution into a SIPP up to £40k if supported by UK Relevant Earnings, and possibly more if
UK Relevant Earnings are higher and the excess can be covered by unused Annual Allowance carried forward.
My question therefore is whether or not the amount of salary exchanged/sacrificed is excluded from the determination of UK Relevant Earnings?
This would appear to make sense as no tax would have been paid on the value exchanged so why should it count towards the value that could be paid into pension attracting automatic Relief At Source of 25%.
Take this example (ignore NIC):
Total remuneration paid by Co. £70k
£30k is tax free severance pay (excluded from UK RE as untaxed)
£20k paid into Group Scheme under Salary Sacrifice.
Is UK Relevant Earnings in the above case £40k (£70k - £30k), or £20k (after the un-taxed pension contribution is excluded)?
If UK RE is £40k, the member could contribute £32k into their SIPP and obtain £8k of RAS.
If UK RE is £20k, the max. personal contribution should be £16k with £4K of RAS.
In both cases, the total paid into both schemes would exceed £40k in total but as the company contribution is irrelevant, there is no need to consider tapping into available c/f AA.
Edited by Mogul on Wednesday 24th February 17:04
I thought HMRC didn't care who made the contribution - you or your employer - the limit is £40k in total - did I misunderstand that ?
https://www.gov.uk/tax-on-your-private-pension/ann...
The advantage of salary sacrifice is that if you're a higher rate tax payer, then it's all sorted at source rather than reclaiming from HMRC. You can also avoid NI contributions on the sacrificed amount.
https://www.gov.uk/tax-on-your-private-pension/ann...
The advantage of salary sacrifice is that if you're a higher rate tax payer, then it's all sorted at source rather than reclaiming from HMRC. You can also avoid NI contributions on the sacrificed amount.
Edited by Carbon Sasquatch on Wednesday 24th February 19:33
Thanks - I believe that I get it now…
Salary Sacrifice is just a mechanism to pay gross amounts into a pension (which delivers certain benefits, mainly NI related) but the gross amount paid-in by the employer always counts towards the member's AA.
My main question was about the determination of ‘Relevant UK earnings’ where Salary Sacrifice is in play, but perhaps it is a bit of a red-herring in that whatever Relevant UK earnings might have been prior to the gross contribution having been paid-in by the employer, the 'residual' Relevant UK earnings figure will be relevant for testing any further contributions that are to be planned and it will have been reduced by that initial gross employer-funded contribution.
e.g. £75k Relevant UK earnings V1 (before any pension input by the employer)
£20k paid in by employer (via SS in this example)
£55k Relevant UK earnings V2 (after the employer’s gross contribution)
In this case, the member might have thought he had the full £75k of Relevant UK earnings to play with, but as he has already used-up the first £20k worth, he’s left with £20k gross to remain within the current year’s £40k AA, but could possibly fund up to another £35k gross (i.e. a total of £55k gross) if only he has sufficient (i.e. at least £35k of) unused carried forward AA available.
Salary Sacrifice is just a mechanism to pay gross amounts into a pension (which delivers certain benefits, mainly NI related) but the gross amount paid-in by the employer always counts towards the member's AA.
My main question was about the determination of ‘Relevant UK earnings’ where Salary Sacrifice is in play, but perhaps it is a bit of a red-herring in that whatever Relevant UK earnings might have been prior to the gross contribution having been paid-in by the employer, the 'residual' Relevant UK earnings figure will be relevant for testing any further contributions that are to be planned and it will have been reduced by that initial gross employer-funded contribution.
e.g. £75k Relevant UK earnings V1 (before any pension input by the employer)
£20k paid in by employer (via SS in this example)
£55k Relevant UK earnings V2 (after the employer’s gross contribution)
In this case, the member might have thought he had the full £75k of Relevant UK earnings to play with, but as he has already used-up the first £20k worth, he’s left with £20k gross to remain within the current year’s £40k AA, but could possibly fund up to another £35k gross (i.e. a total of £55k gross) if only he has sufficient (i.e. at least £35k of) unused carried forward AA available.
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