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

Sorry, I could have been clearer. I was pointing out the downside of pensions in general compared with ISAs. Salary sacrifice saves NI but you pay tax on withdrawals with pensions.

LISAs = no NI benefit but no tax on withdrawals

If you have a student loan, salary sacrifice will reduce student loan repayments as well as the NI savings.

Yes, a lower rate taxpayer gets more NI relief than a higher rate one does (the tax relief happens anyway).

You pay tax on your pension when you draw it (aside from the 25% tax free) but you don’t pay tax on the money on the way in. You also (in this case) don’t pay NI on the way in. Pensioners don’t pay NI so you won’t pay that when you draw it.

The reason pensions tend to be tax efficient (even for basic rate tax payers) is that people tend to have a lower income overall in retirement so pay less tax deferring the taxable income to retirement.

The other option you have is taking the salary now, paying tax and NI on it and putting it in an ISA. That would be tax free when you draw it (because it’s funded from taxed income and you don’t pay tax on the gains / income in an ISA).

Yes. Literally everyone I know does this. Unless he wants to end up elderly and struggling why wouldn’t he plan for his pension??

I understood you and my previous reply to you did refer to salary sacrifice, which is what my employer offers and what I opted in to. SS allows payment of lower NI contributions as well as lower income tax.

You haven’t read the thread …he is paying into a pension.
This is about salary sacrifices re pension - pros and cons.

You seem to have missed the entire point of the thread.

My pension is salary sacrifice. My payslip still shows my "full" salary with my salary sacrifice pension contributions as adjusting items below. I didn't have any issues when applying for a mortgage back in December.

Yes. Most companies will share at least a bit of their NI saving. Make the most before the government takes away the benefit!

That is every defined contribution pension scheme, salary sacrifice or not. You save up a pot of money, get 25% tax free (up to £268,275) and then the remainder or your pot pays you an income which is taxable as income but only income tax, no NI when you’re a pensioner.

the benefit of salary sacrifice is a tax and NI saving, hence why the gov is taking away the benefit.

£30k salary less 5% is a net income of £23921

£30k with a salary sacrifice of £1500 is £24,041

Bigger salaries = bigger savings

As @TheOneWithUnagi @Overthemoun and some of the others the main difference with salary sacrifice is that it is taken from salary before tax and NI are deducted. Pensions payments in get tax relief anyway so the saving is in NI and net salary (take home pay) should be higher. The gross salary after sacrifice will be lower though. Employers also save on employers NI contributions and some will add this to the pension too.

Hopefully the employer has a worked example they can share to illustrate the difference. For most people it's worth doing.

He is making pension contributions already. He is being asked if he wants to exchange some of his remaining salary for extra pension contributions to boost his pension pot.

As I understand it:

Pros:

• Pension pot increases
• You save 8% National Insurance payments
• You don't pay tax on that part of your salary
• if you receive Universal Credit, it goes up because your net wage goes down

Cons:

• That portion of your wage is locked into your pension so you can't use it
• If you get maternity, paternity or statutory sick pay, it is based on the lower salary
• You can't salary sacrifice an amount that takes you below minimum wage
• Life Insurance payouts that are based on income will be lower
• Income protection payments will be lower
• Credit card borrowing limits may be affected
• Mortgage borrowing limits may reduce

If you can afford to have less cash each month you will save money overall and have a better pension.

Although student loans come out after tax the amount is based on gross income before any deductions

This is incorrect. Pension salary sacrifice reduces the salary used in the student loan calculation and so reduces the student loan repayments. (Which may increase the term and interest amounts that an individual pays).

Sorry I was slightly mistaken, it does come from gross pay so in usual circumstances if you increase pension contributions it doesn't reduce the amount you would as it does for income tax. So you can't increase your pension contributions to reduce your student loan repayments.

The salary sacrifice acts to reduce your gross pay so yes you are right it reduces student loan repayments. Sorry 6 months old and not enough sleep!