Should a basic rate taxpayer opt into salary sacrifice pension?

[ilovebrie8]

Salary sacrifice pension yes or no?

My partner’s employer is asking is he wants to opt in to salary sacrifice or opt out re pension? He’s a lower rate tax

Yes. You save NI payments as well as tax. I can't think of a situation where salary sacrifice wouldn't be preferable? (I'm sure there are some, but they're anomolies)

Not sure what the relevance of being a basic rate tax payer is, but everyone working a full time permanent-ish job should be paying into a workplace pension.

Absolutely opt in. A basic rate taxpayer gets automatic tax relief on their pension contributions, and pays less NI. Salary sacrifice is a technicality that allows payment of less tax - it doesn’t mean you actually earn less.

The only negative with salary sacrifice is that you part with the money over the months and if you feel later in the year that you would’ve preferred not putting it into pension then you can’t undo it. But NI is a huge benefit of doing it as salary sacrifice rather than a lump sum towards end of the year. Worth checking how much the NI saving amounts to which might help you decide.

Absolutely yes.

If you look on a salary calculator website you can see how much you can put in your pension. It’s fairly accurate.

He is paying into a pension but they’ve asked if he wants to opt in to salary sacrifice re the pension as it’s a new tax year.

There was a thread a few months ago about salary sacrifice pension and half the posters didn't know what it meant and thought the OP was just asking about workplace pension. I suspect this thread is heading the same way.

Both employee and employer benefit from lower NI payments, but I don't know by how much. The downside is that the official annual salary appears to be less, which might be a problem when showing proof of salary, eg for a mortgage application. But I don't know if there's a way to explain that it's due to salary sacrifice and the 'real' salary is higher. Easier to do if you're in a job with fixed salary spine points

Seems rather odd that the employer should ask. Either way it's worth it as the employer also pays in or is this over and above the basic percentage?

Your gross salary on paper stays the same so there's no disadvantage there.

Sorry if any confusion…he’s not asking about a workplace pension.

its about salary sacrifice opt in- HR have asked if he wants to opt in to salary sacrifice as of this tax year?

The employer has to ask because it’s a legally binding agreement to reduce your salary in exchange for additional pension. The employee has to agree to this.

OP - salary sacrifice pension will save NI at 8% for basic rate taxpayer so very worthwhile doing.
The 20% tax is saved regardless of whether salary sacrifice is used or not, so NI is the only difference through the salary sacrifice arrangement.

caveat as mentioned is that official salary will be lower so something to consider for mortgage applications, minimum wage considerations etc. If no concerns then yes definitely salary sacrifice is the way to go.

Why would he not? Less tax and NI for him to pay, it a no trainer really.

OK. I don't ever remember being asked if I wanted to opt out. If anyone wanted to they had to ask themselves.

We have a salary sacrifice scheme where additional % can be added from salary but that's not matched by the employer. I wondered if that's what the OP meant.

I oversee finance and our payroll function and we have 2 options.. employee can make 4/5/6% contributions and can choose to do these either as salary exchange or as deductions.

option 1 attracts tax savings for employee as well as NI savings for employee and employer

option 2 only attracts tax savings for employee.

Both options get matching employer contributions.

there is just the choice around the mechanism of the contribution, which is what I understand OP is referring to as well.

employees where I work can also make additional contributions (which aren’t matched) and can choose either salary exchange or deduction - so exactly the same.

I did, I earned about £30k. We had to opt in as it can affect the amount you can get for a mortgage.

The employer also saves NI on company contributions which some schemes also add to the pot. This NI saving is due to be limited to £2k but not for a while yet.

Definitely opt in to salary sacrifice

Definitely opt in whilst we still have the option - the government are limiting the benefits to the first £2K of salary sacrificed in 2029.

With a salary sacrifice pension you save on NI as well as tax (at present), however the downside is that although you'll get a 25% tax free lump sum, any other withdrawals are taxable income.

With a lifetime ISA you get the tax benefits (up to the first £4000 you pay in iirc) plus withdrawals are tax free.

So it's worth considering whether it makes sense to use the LISA allowance first. Employers sometimes have other incentives for paying into your pension, so you need to check these too.

If you don't opt in to salary sacrifice are you saying that any withdrawals won't be taxable income then? He has been opted out until now.

A new pension provider took over and they are asking does he want to opt in to pension salary sacrifice...it seems very confusing.

OP - my employer are changing to a salary sacrifice pension at the moment and their advice is for people to get independent financial advice before making the decision. It sounds like some people on this thread are confusing salary sacrifice with a standard workplace pension, so you will not be getting good advice. It is a lot of money over the years so if I were you I'd look into getting expert advice from an IFA.

It lowers your gross salary so it can affect anything that's linked to that - gross earnings for mortgage purposes, death in service benefits etc. If he's not bothered/ impacted by those then it's beneficial, but it's not a no brainer, you do need to consider whether his gross salary is linked to the calculation of any other benefit he has through work and whether it matters to you whether he has a lower gross salary.

No difference with withdrawals whatsoever. Only impacts treatment of contributions on the way in.

salary sacrifice saves 8% national insurance on the way in (for BR tax payer). That’s the main difference.

£100 contribution costs £72 net if salary sacrifice or £80 net if non salary sacrifice.

downside is that gross salary may be considered lower for other benefits as mentioned elsewhere in the thread.

all else being equal - salary exchange saves 8% NI vs non salary exchange so likely worthwhile doing.

if still unsure he needs to ask his provider for pros and cons of each as some of the advice on this thread is unclear and confusing.

Thanks @TheOneWithUnagi .

I was replying to what @MotherofPufflings wrote as she said:

"With a salary sacrifice pension you save on NI as well as tax (at present), however the downside is that although you'll get a 25% tax free lump sum, any other withdrawals are taxable income."

That was confusing me...