Worried about salary sacrifice changes

[Bunny44]

Hello I've just started a new job on £110k. I'm a single parent to a 2 yr old with no CM so it sounds like a lot but it has to go far especially as I live in London. I pay in 10% to my pension to keep my earnings under the £100k threshold and so far the free 15 hrs and tax free childcare scheme have been really helpful.

I've read salary sacrifice scheme may be scrapped as part of Labour's changes. I did some calculations and realised I would be around £3000 worse off earning £110k than £99k due to the value of the childcare help vs the extra amount I'd actually take home.

I guess in that case if this goes through I'm going to have to ask for a lower salary?? Or ask to go part time (prob not allowed though). Any other suggestions?

Labour can and most likely will do nasty things with pension and you are their prime target (high earner, not internationally mobile).

It would be madness to ask for lower salary, but you can try to ask to reduce your hours, even 10% will help and give you much needed free time.

Failing that you can ask for unpaid parental leave
Unpaid parental leave: Entitlement - GOV.UK (www.gov.uk)

Again, it will give you free time and reduce your taxable income to move you under £100k.

Your worry is fully legitimate and just shows how mad Labour's approach is.

I'm not sure I understand what you mean - pension contributions that don't go through salary sacrifice are still counted when calculating whether your income is above or below £100k in order to get the childcare help.

What DancingPhantoms said. All pension contributions that you make can be deducted from your earnings, so even if salary sacrifice is stopped you could just make a pension contribution without salary sacrifice and still take your income under £100,000. It would probably mean that you pay a bit more national insurance but wouldn't be huge amounts.

@guineapigthyme I didn't think that was the case as it's just I can claim back some of the tax but unless it's salary sacrifice it still will be listed as my salary unless I've misunderstood?

Just to add I'm finding all very confusing in general. For instance my company has taxable benefits that would be useful but I don't want to opt into because of the threshold and taxes. Includes private medical and dental (actually needed as I've not been able to get either of us an NHS dentist). The Conservative's talked about adjusting the threshold so it didn't disadvantage single parents (2 parents can earn £90k and still claim free hours whereas a single parent on £100k cannot) but doubt that will be reviewed under Labour.

Really annoying as I've paid so much in tax over the years and claimed nothing but I feel like because I waited till later to be more financially stable I'm somehow penalised.

Your getting a bit confused here.

Whatever changes happen to pensions, they’ll still exist. They may alter tax relief either on contributions or on the lump sum withdrawal but they’ll still be a thing.

How you pay into a pension doesn’t matter in terms of calculating your qualifying salary for funded childcare.

Salary sacrifice is the best way condoning you have the choice because you also benefit from lower NI contributions. If that’s not available then either paying through a company scheme with your employer adding a sum to your contributions is next best. Failing that you can simply pay into a private pension.

All of them result in your qualifying income for funded childcare being reduced.

You just need to do a self assessment tax return each year and you will get full tax relief on any contributions.

The gov.uk page on free childcare says that your eligibility is based on what they call your 'adjusted net income', and that's what needs to be under £100k. I've linked the page below explaining 'adjusted net income' in more detail, but basically for you it'd be your salary minus any pension contributions.

https://www.gov.uk/guidance/adjusted-net-income

I've also managed to find a thread on the HMRC forum where someone asks whether they can deduct a personal pension contribution to calculate their adjusted net income, and HMRC confirmed that they can.

Adjusted Net Income and Childcare Tax Free - Community Forum - GOV.UK (hmrc.gov.uk)

I don't think you have anything to worry about 🙂

If you are only just over 100k and have a nursery age child you really do need to try and keep your qualifying earnings below 100k otherwise you’ll pay a marginal rate of income tax of 60% + NI and will lose your funded hours. It means you are barely any better off earning 125k than you are earning 99.9k.

You should opt in to these but contribute more to pension to offset it

super annoying but 🤷🏻‍♀️ cest la vie

Not to confuse matters anymore, but I believe you could potentially opt into those benefits you mentioned (healthcare and dentistry), and as long as you increase your pension contribution to offset the value of these benefits (so that your adjusted net income stays under £100k) you will still get the tax-free childcare.

Is your employer big? Do you know if they're in touch with any financial advisers who could potentially help you understand your options and work this out with you? Some big employers have relationships with financial advisers for stuff like this. Alternatively would your HR/payroll department be able to offer any advice?

Reading this thread with interest as I’m “struggling” with a similar issue and trying to work out how best to manage it.

Husband has had a recent pay rise, with gross salary around 120k. Pension contributions are 13.5%. So his net adjusted income will be just over 103k. If he earns over 100k, we will lose out on around 12k government funding towards childcare (tax-free childcare and funded hours). I currently earn less than the threshold as work part-time, but I manage the finances.

Would we still be able to qualify for the funded childcare if he makes around 4k in contributions to a private pension? I’ve been reading about it but can’t quite figure it out. Given that this money would come from his net adjusted income, I’m not sure how making private pension contributions would help in bringing his earnings below 100k?

Sorry to hijack the thread OP - but it looks like the people advising you know their stuff! I N nope you find a solution. It seems mad that your/my husbands promotions stand to make us both significantly worse off!

If he makes 4k contributions to a private pension and that brings his total qualifying earnings below 100k you will retain the full funded childcare hours.

If he doesn’t already he will need to fill out an annual self assessment tax return. This will ensure he pays the correct tax.

I'm going to buy extra holidays to bring my salary under the threshold. Is that a possibility?

Yes. That works too.

Would we still be able to qualify for the funded childcare if he makes around 4k in contributions to a private pension? I’ve been reading about it but can’t quite figure it out. Given that this money would come from his net adjusted income, I’m not sure how making private pension contributions would help in bringing his earnings below 100k?

The additional £4k payments would reduce his net adjusted income further.

It's not compulsory for employers to offer salary sacrifice. There are benefits to them if they do, but they don't have to. Employees working for such companies aren't shut out from this benefit of pension payments reducing net adjusted income.

If you pay into a pension through salary sacrifice, pay into a workplace scheme, or pay into a private pension, it all counts.

The press are creating hysteria, panic and madness.
I am getting calls from clients wanting to take out all their tax free cash from their pensions because they think it will be abolished.
We are being prepared for a tough budget but until we know what the changes will be, we can’t really provide advice.
There may potentially be changes to salary sacrifice/company pension contributions as there‘s a loss to the treasury from NI contributions from both employee and employer.
You will still be able to make pension contributions ffs.
She could reduce the £100k threshold because „you are rich if you earn that much“.
If people are financially worse off working, they will reduce their work as we have seen with doctors and I believe Rachel Reeves understands that.

Great, thank you!

I was concerned because the private pension payments won’t come directly on his payslip like his current pension contributions, and will be made from the net income he receives. So, to HMRC, it will still look like he’s earning 103k net adjusted.

I presume that this issue is addressed through the self assessment tax return? HMRC are informed this way about the contributions and that the total for the tax year is less than 100k? And I think the tax already paid on the money that’s put into the pension can currently be reclaimed? In which case, I’ll need to account for that too.

I think I need to get an accountant.

I really hope so

Given the amount of freebies sir Keir is taking to "scrape by" he presumably understands that a 100-200k pre tax salary does not buy a champagne lifestyle in london without generational wealth propping it up especially if you have children

Why wouldn’t he just increase his contribution to his work pension?

Good question. He could do this, but there are several reasons why I think a private pension might be a better option.

Most of his income is fixed, but around 15% is based on ad-hoc or extra work (not bonuses), so it isn’t entirely predictable or a regular amount each month. It’s mainly this work that takes his pay beyond the 100k threshold, and I thought it might be easier to put this part of his pay into a private pension each month. So it wouldn’t be a regular monthly amount. I don’t think this would work if he paid into his work pension. Even if it’s a theoretical possibility, I don’t think HR/payroll would make it happen!

Also, I believe that private pensions can be accessed at a younger age than his work pension, by about 10 years. I don’t want to rely on us needing it, but it might be nice to potentially have that options eg. When the kids are around university age or leaving home.

Thanks for the responses everyone - really helpful. Clearly I didn't really understand and should stop worrying. I can just wait and see the changes and put more into my pension if needed.

@guineapigthyme I don't necessarily want to pay more than necessary into my pension as I'm trying to save up to move house and if I already pay in 10% that's a lot. So for that reason I might not opt into the benefits, also because I'll pay 40% tax on them and it may be several 1000. But I'll do the calculations and see.

No they don't.

@DancingPhantomsOnTheTerrace sorry hit send too soon. What I meant to say was I think some confusion with the wording I.e salary sacrifice but the OP can increase pension contributions in order to reduce salary to a level where she will qualify for free hours and not lose her tax free allowance.

Yes they do, it’s your income after any pension contributions are deducted, salary sacrifice or normal workplace scheme. Its after other deductions too, old style childcare vouchers, buying more annual leave, unpaid leave etc.