Work place pension/salary sacrifice

[Dasher789]

I probably should speak to an IFA but can anyone help please?

I live in Scotland and I earn £50k pa so technically, I should pay the higher rate tax. I pay 18% pension contributions via salary sacrifice to remain a basic rate tax payer. My employer pays 12%. Is this the best approach as I understand that if I paid high rate tax, I could claim back higher rate pension relief?

I didnt start paying much attention to my pension until I was about 30. I am very worried about funding retirement and I have a large mortgage. I don't have any children yet so I am keen to make hay on my savings whilst I have limited outgoings to hopefully help clear down my mortgage when I can take my tax free lump sum.

I think if you are contributing to the workplace pension via salary sacrifice then the higher rate tax relief has already been taken care of as the contributions are coming from your gross salary. I’m no expert though!

I have been wondering similar about whether it is feasible to stuff the pension as full as possible and then use this to pay down mortgage at 57, rather than make post tax overpayments on the mortgage each month. Ie benefit from the tax relief at 40%. However, for now I’m just overpaying the mortgage to try and make some inroads into it - the lump sum option seems a bit far off and who knows what the pension rules will be at that point.

Great if you are putting in 30% pension contributions through, and sensible to max out the 40% relief too.

@shipwrecksunset thanks. I'm definately not getting the 40% tax relief benefits as I'm paying so much into my pension that my salary has dropped to below the high rate threshold. That's why I am not sure if I'm actually benefitting myself by paying in so much. I am not overpaying the mortgage at all at the mo, its so confusing to know what to do for the best

The money is going in gross of any tax. You only get the tax back when you pay out of your net salary (i.e. after tax). The tax relief gets you up to your gross payment. So £100 gross via salary sacrifice is £100 in the pension.
If taxed at 20% out of your £100, £20 is taken for tax, and £80 in your pension. You can claim the £20 in tax relief.
If taxed at 40% out of your £100, £40 is taken for tax, and £60 in your pension. You can claim the £40 in tax relief.

So what you are doing is fine.

You're getting a great contribution, keep it

For 2020-2021 the tax free allowance is £12570. The cut off for 40% is £37700.

That means you would need a salary (and benefits) over £50270 per year.

So unless you have other income you are not in the higher tax bracket.

SORRY!!! 2021-22

Still not got used to what year it is 😂

The other benefit of salary sacrifice is that you don't pay national insurance on the contribution, so I think that is an additional c12% saving at the numbers you have quoted above.

Disclaimer - I am not in Scotland and am not completely sure whether NI works in same way.

The growth on your pension if invested well will totally outstrip any interest you save by overpaying the mortgage. I’ve just had some IFA advice on this, and by switching the investment options on my pension and putting in the money I was overpaying on the mortgage to the pension instead, the projection went from my money running out when I am 70 to being able to have the same amount each month until I am 90. I would really recommend getting advice - for me it was £500 or so very well spent!

@dreamkitchenhelp thank you, that makes sense and is a relief. I had understood it wrong before.

@spookyscaryskeletons sorry, not sure what you mean? Anything above £43662 in Scotland is taxed at 41%

@rainbowshine that sounds great. Iv tried to look at funds but I'm going to try and find a local ifa and get an appt. Iv got time now but it will run away from me if I do nothing!

Thank you!!

Apologies @Dasher789 I'm quoting English rules at you! That will teach me to read more thoroughly!

@spookyscaryskeletons don't worry! It is so annoying having the separate rates, i wish I lived a few miles south

You really need to contact your payroll department and ask them what the tax arrangement is on your pension contributions. Without that information we are purely guessing as there are 3 different deduction types for pension contributions.

If they are deducting as true salary sacrifice then your tax savings will be at the tax rate your normal full salary would attract - so in your case some at 40% and then some at 20%

If it's a net pay arrangement then 80% of the 18% is taken from your salary and 20% of the 18% is paid into the same fund by HMRC. For the portion of that 18% that was due at 40% tax you would need to do a self assessment claim for the additional tax relief you have missed out on.

But it's impossible to review the situation without the confirmation from your employer of how the scheme is operated.

@spookyscaryskeletons when I signed up to salary sacrifice. I had to sign a form to say I accept that my pay was being reduced to X amount (42500 ish) so I don't pay any tax at 41% (scot rate) because the money to my pension is removed from my pay

[quote Dasher789]@spookyscaryskeletons when I signed up to salary sacrifice. I had to sign a form to say I accept that my pay was being reduced to X amount (42500 ish) so I don't pay any tax at 41% (scot rate) because the money to my pension is removed from my pay[/quote]
Ah then well yes definitely the best approach as you are making the savings on your NI too :)

And just to be 100% sure - you don't need to claim any further tax relief. By taking the salary reduction in exchange for pension contributions (this is the true meaning of a salary sacrifice arrangement) you are already gaining the benefit of not paying the higher tax rate in your salary each month.

@spookyscaryskeletons thank you so much. This thread has been a huge help to me

I instructed the woman who does our payroll to put an extra £250 per month into my pension from my salary. The idea being that I would pay less tax on the amount left. Am I correct in this assumption? And is this salary sacrifice?

@HappenstanceMarmite

I instructed the woman who does our payroll to put an extra £250 per month into my pension from my salary. The idea being that I would pay less tax on the amount left. Am I correct in this assumption? And is this salary sacrifice?

Hi, you will need to check what the tax arrangements are on your current employer pension.

Some operate as salary sacrifice (tax savings at source) and some operate as net pay (equivalent tax relief paid into your pension by HMRC).

Difficult to answer your question without knowing which one your employer operates.

Thank you @SpookyScarySkeletons