Pension 25% Cash Free Lump Sum .... Last chance saloon?

[Protagoras]

As an umbrella worker I get how a general increase in ErNI affects the overall income and what is left to distribute via paye salary and pension, but lets say the worker is currently paying £2k as salary sacrifice and they continue to pay £2k surely all that goes into the pension.

Under the scenario we're discussing, unless your client is going to increase your 'assignment rate' (!), your 'employer' will be paying less into pension, or reducing your gross salary.

[gables]

Where do you think the 13.8% ErNI on that amount is going to come from? It's coming from the same place the rest of the ErNI, AL and every other tax is coming from...

Under the scenario we're discussing, unless your client is going to increase your 'assignment rate' (!), your 'employer' will be paying less into pension, or reducing your gross salary.

It might be I'm misunderstanding how salary sacrifice works\is taxed or not.

So let's say for example, an Umbrella income of £10,000: ErNI @13.8% would be £1380, AL £50, Umbrella margin £100 leaving £8740. From this a salary sacrifice of £2000 into pension leaving the remaining £6740 for PAYE.

Let's say increase in ErNI goes up to 14.2% (as an example) then the above becomes £10,000: ErNI @14.2% would be £1420, AL £50, Umbrella margin £100 leaving £8430. From this a salary sacrifice of £2000 into pension leaving the remaining £6430 for PAYE.

The amount into the pension is still the same no?? Yes there's a small hit on gross salary (as indicated by Protagoras) but surely salary sacrifice is still a good proposition?

On reflection it's me and how I first interpreted James' statement "but salary sacrifice just became a lot less attractive and this was pretty much the last opportunity for tax planning enjoyed by umbrella workers." which I interpreted as the £2000 getting taxed at ErNI thus reducing it before going into the pension, but that would be double taxation(?) - I hate my brain sometimes

[Protagoras]

It might be I'm misunderstanding how salary sacrifice works\is taxed or not.

So let's say for example, an Umbrella income of £10,000: ErNI @13.8% would be £1380, AL £50, Umbrella margin £100 leaving £8740. From this a salary sacrifice of £2000 into pension leaving the remaining £6740 for PAYE.

Let's say increase in ErNI goes up to 14.2% (as an example) then the above becomes £10,000: ErNI @14.2% would be £1420, AL £50, Umbrella margin £100 leaving £8430. From this a salary sacrifice of £2000 into pension leaving the remaining £6430 for PAYE.

The amount into the pension is still the same no?? Yes there's a small hit on gross salary (as indicated by Protagoras) but surely salary sacrifice is still a good proposition?

On reflection it's me and how I first interpreted James' statement "but salary sacrifice just became a lot less attractive and this was pretty much the last opportunity for tax planning enjoyed by umbrella workers." which I interpreted as the £2000 getting taxed at ErNI thus reducing it before going into the pension, but that would be double taxation(?) - I hate my brain sometimes

I popped your scenario numbers into my model, for illustration, on the basis of 13.8% ErNI allowing the model to adjust salary and fix pension. The first column shows the impact of ErNI applied to the pension contribution.
(Numbers in light grey are just numbers the model uses for working).


N.B. This model hasn't been checked by anyone else!

[gables]

I popped your scenario numbers into my model, for illustration, on the basis of 13.8% ErNI allowing the model to adjust salary and fix pension. The first column shows the impact of ErNI applied to the pension contribution.
(Numbers in light grey are just numbers the model uses for working).


N.B. This model hasn't been checked by anyone else!

Ok hang on... first up I apologise if I have confused things as for some reason I've conflated media talk of an increase in ErNI (as shown in my calculation) with ErNI being applied to employer pension contributions.

Having said that, when I look for what is being proposed I'm seeing statements like this:

BBC:
One option for the chancellor is to make employers pay at least some NI on the money they put into workers' pensions.

fidelity.co.uk
Rumours have been gaining ground that the government could be about to widen National Insurance charged on the pension contributions made by employers for the benefit of their employees

investorschronicle.co.uk
Finally, the government could start levying national insurance on employer pension contributions. This option would have the benefit of raising significant cash with no instant consequences for the vast majority of pension savers;

To illustrate how I interpret those statements let's take a permie earning £5k/month (gross) The employer might contribute 6% to a pension so that would be £300, if the above statements prove true then the employer would pay an additional percentage of the £300 in some level of ErNI, worst case the full 13.8% so an additional payment to HMRC of £41.40 and both the £300 and £41.40 come out of the company coffers.

In the case of the Umbrella worker in Protagoras example surely this ErNI levy on Employer pension would only apply to the 3% employer pension of £202.17 = £27.90 which would to come out the £10k income, the figures would adjust a bit but surely not raising ErNI from £1177 to £1610?

And in the case of myself where I have opted out of the employer's pension then surely any levy against the employers pension won't apply?

[sadkingbilly]

so you're basing Your speculations on other people's speculations?
good luck for a successful outcome.

[Protagoras]

Gables, I don't think you're conflating ...

It's the nature of speculation, that there are many, many scenarios. These include rumours of ErNI rate increases, ErNI on employer pension contributions, speculation about dividend taxes, capital gains tax etc.

However, I expect that all pension contributions made by an umbrella company to a pension scheme from 'gross' income would count for ErNI, not whether it is notionally a pseudo-employer contribution or a salary sacrifice.

Clearly, the greater the level of SalSac to pension, the greater the impact of this on an umbrella worker. That said, there could be a different rate of NI applied from the current 13.8% ErNI. Who knows?

I think that these rumours are bad for the economy; clients seem to be 'on hold' while many individuals are taking 25% lump sums now ahead of possible rules changes, or taking action to head-off CGT changes.

[SussexSeagull]

I would be tempted to wait for the actual announcement.

[GJABS]

It might be I'm misunderstanding how salary sacrifice works\is taxed or not.

So let's say for example, an Umbrella income of £10,000: ErNI @13.8% would be £1380, AL £50, Umbrella margin £100 leaving £8740. From this a salary sacrifice of £2000 into pension leaving the remaining £6740 for PAYE.

Let's say increase in ErNI goes up to 14.2% (as an example) then the above becomes £10,000: ErNI @14.2% would be £1420, AL £50, Umbrella margin £100 leaving £8430. From this a salary sacrifice of £2000 into pension leaving the remaining £6430 for PAYE.

The amount into the pension is still the same no??

Both scenarios above apply to the case where employer's NI is deducted from the original £10,000 before any deductions, pensions or otherwise, are made. That may be introduced in the Budget, but it is not in force at the moment. At the moment the £2000 is deducted from the £10,000 to leave £8000. Then take off AL £50 to leave £7950. And only then take off Employer's NI @13.8% * £7950 = £1097.1, leaving £6852.90 for PAYE.
Therefore you are £6852.90 - £6430 = £422.90 better off in gross PAYE terms, despite having made the same pension contribution.

Another way of looking at it, is that you could have alternatively made a pension contribution of around £2400 instead of £2000, and got the same net PAYE figure.

[sadkingbilly]

I would be tempted to wait for the actual announcement.

that's sensible! on CUK??

[Cookielove]

My pension not doing great, returns are low....thinking to withdraw the 25% and invest it elsewhere? any thoughts? Just at age now where I can take it out and returns are not great when I look at the year on year statement...