Reply to: Consequences of too much salary sacrifice into a pension??

[willendure]

No real choice there - the agency will only work with certain umbrellas and the others on their list had far far more archaic restrictions.

I hate those people - its your money after all!

I briefly looked at going inside IR35 and one umbrella agency told me that you could only put pension money into their own pension scheme, no SIPP or anything like that. You could once the contract ended move the money out to your own scheme.

[Olly]

I suppose you could also consider changing to a more effective and helpful umbrella? You pay these people after all...

No real choice there - the agency will only work with certain umbrellas and the others on their list had far far more archaic restrictions.

[Fred Bloggs]

I believe you might be wrong and that the tax on excess contribution is whatever income tax you would have paid if you hadn't done it.

That was tax for exceeding LTA. LTA has gone away so logically the 55% tax has. I wouldn't be surprised at all to see it return in the foreseeable future.

[willendure]

My umbrella will only agree to pay a % of day rate via salary sacrifice into my private pension.
I asked the umbrella - Paystream - they don't know.

I suppose you could also consider changing to a more effective and helpful umbrella? You pay these people after all...

[Olly]

I can't be bothered looking it up, I already did too much of that. I believe, but could be wrong, that the excess contribution tax is 55%. Anyone who wants to know for sure, I recommend Google.

I believe you might be wrong and that the tax on excess contribution is whatever income tax you would have paid if you hadn't done it.

[Protagoras]

I've discovered I've likely overpaid (hopefully not too much) this year and last (missed that I had to include any increases on a defined benefit pension and last years tax relief on a lump sum contribution outside of salary sacrifice took me over).

Re: "I had to include any increases on a defined benefit pension"

Just to note that there's a deferred pension exemption, but presumably you're not eligible to take advantage of this.

https://techzone.abrdn.com/public/pe...wance#anchor_3

[Aeia]

If your income is up to the 40% band (my intention in retirement) then the effective rate of tax is 15% because of the tax-free allowance - it's not 20% as you've written above. Then knock off the fact 25% of your pension is tax-free and the 15% drops to 11.25% in addition pension growth is taxed at that 11.25% too, not at your marginal rate as it would be if you'd taken the income and stuck it in NS&I. You could bring capital gains into the equation I suppose, but mine would be used by other investments and the gov are on a journey to make CGT allowance small.

I find it very misleading to talk of employers NI as 13.8%. Firstly there's an NI free allowance each month and secondly, you don't simply take 13.8% of your total income off as NI. e.g. some real-life figures.

Gross Salary £ 4,649.52
Apprenticeship Levy £ 23.25
Employer NI £ 537.03

That £537 Employers NI is 11.55% of gross salary.
My salary varies as I'm on a day rate and it looks like employers NI has averaged at 11.25% (will check that though)
Ok what else is there to take into account - well the 2% employees NI is on income after deductions so you'd partly be double counting to simply add it to the (incorrect) 14.3%
I will do some sums later but I'm going to guess at all adding up to about 13% - a big difference to 16.3%

There's no point factoring in the income tax avoided and then repaid as those will be equal I assume.

Ok so what have we concluded - unless I've got this very wrong (which often happens with tax stuff) then I'd be better off overpaying into pension but only by a couple of % assuming no growth, quite a bit more if the pension does well. It is, however, all predicated by being able to live on an income =40% threshold in retirement.

I think the issue is that when you draw out the money from a pension you're taxed on it (albeit likely at the standard rate unless you have a massive pension pot) so if you're taxed on anything you put in you're taxed on it again when you draw it out.

I've discovered I've likely overpaid (hopefully not too much) this year and last (missed that I had to include any increases on a defined benefit pension and last years tax relief on a lump sum contribution outside of salary sacrifice took me over). I have carry over I can use just need to figure out how to do this.. I'm expecting self assessment.. haven't had to do a self assessment yet....

[Hairlocks]

I find it very misleading to talk of employers NI as 13.8%. Firstly there's an NI free allowance each month and secondly, you don't simply take 13.8% of your total income off as NI. e.g. some real-life figures.

Gross Salary £ 4,649.52
Apprenticeship Levy £ 23.25
Employer NI £ 537.03

That £537 Employers NI is 11.55% of gross salary.

That is misleading when talking about pensions and umbrella as the allowance is a the bottom, the difference is not 11.55%. To make the numbers simple if you are using salary to reduce your yearly gross salary by £10,000 (in the £50-£100k range) than you don't need to pay the 13.8% of employer NI = £1,380 nor the apprenticeship levy at £500. Also you don't pay £2000 employee NI and £4,000 income tax.

In short if you reduce you gross salary by £10,000 your net yearly take home reduces by £5,800 and your pension receives £11,880 instead.

[Fred Bloggs]

I wonder, if one has triggered the reduced MPAA of £10k, it is allowable to make contributions beyond that and just pay the tax on them?

Yes you can. You'll pay tax on the contributions above MPAA. But -

In my opinion, it's better to take the money as taxed income and invest it within an ISA. Then there's no prospect of further tax on resulting investment income.

[Protagoras]

I wonder, if one has triggered the reduced MPAA of £10k, it is allowable to make contributions beyond that and just pay the tax on them?

[MLB]

In my case, non-pension income will use up the tax free allowance. The 20% I stated is on 75% of the pension after deducting 25% tax free amount - effectively 15%. Similarly, I’ve factored in paying full employers & employees NI as current salary (post sacrifice) is already over the allowance/ threshold. The benefit is marginal but i’d rather exceed the AA than not maximise.

[Olly]

I’m also with Paysteam, they deduct salary sacrifice weekly (cost £6) but pay into pension monthly, in arrears, on the 19th - this may make it more difficult to time suppressing timesheets. Paystream allow the contribution amount to be changed at renewal or new tax year and will stop if asked, so you should be able to stop and then restart for new tax year. Assuming your income is over 40% bracket but not £100k my understanding is that you save a small amount even when exceeding annual allowance, 55% (40% tax on overpayment plus 15% on pension drawdown [20% on 3/4 pension]) vs 56.3% (40 + 14.3 + 2).

If your income is up to the 40% band (my intention in retirement) then the effective rate of tax is 15% because of the tax-free allowance - it's not 20% as you've written above. Then knock off the fact 25% of your pension is tax-free and the 15% drops to 11.25% in addition pension growth is taxed at that 11.25% too, not at your marginal rate as it would be if you'd taken the income and stuck it in NS&I. You could bring capital gains into the equation I suppose, but mine would be used by other investments and the gov are on a journey to make CGT allowance small.

I find it very misleading to talk of employers NI as 13.8%. Firstly there's an NI free allowance each month and secondly, you don't simply take 13.8% of your total income off as NI. e.g. some real-life figures.

Gross Salary £ 4,649.52
Apprenticeship Levy £ 23.25
Employer NI £ 537.03

That £537 Employers NI is 11.55% of gross salary.
My salary varies as I'm on a day rate and it looks like employers NI has averaged at 11.25% (will check that though)
Ok what else is there to take into account - well the 2% employees NI is on income after deductions so you'd partly be double counting to simply add it to the (incorrect) 14.3%
I will do some sums later but I'm going to guess at all adding up to about 13% - a big difference to 16.3%

There's no point factoring in the income tax avoided and then repaid as those will be equal I assume.

Ok so what have we concluded - unless I've got this very wrong (which often happens with tax stuff) then I'd be better off overpaying into pension but only better off by a couple of % assuming no growth, more if the pension does well. It is, however, all predicated by being able to live on an income = 40% threshold in retirement.

[mogga71]

My umbrella will only agree to pay a % of day rate via salary sacrifice into my private pension.
I want to max out £60k per year.
Because I don't know exactly how many days I will work it's impossible to give them an accurate % that when added up equals £60k
What would the consequences be of them paying in more than £60K
I asked the umbrella - Paystream - they don't know.
I've posted here rather than in the umbrella sub-section of the forum as I think it's more of an accounting/tax type qu.
Thanks

I did it year before last ... it's no big deal ... you just specify it on your SA. You don't get fined or anything.....you just need to cough up the extra tax.

[MLB]

I’m also with Paysteam, they deduct salary sacrifice weekly (cost £6) but pay into pension monthly, in arrears, on the 19th - this may make it more difficult to time suppressing timesheets. Paystream allow the contribution amount to be changed at renewal or new tax year and will stop if asked, so you should be able to stop and then restart for new tax year. Assuming your income is over 40% bracket but not £100k my understanding is that you save a small amount even when exceeding annual allowance, 55% (40% tax on overpayment plus 15% on pension drawdown [20% on 3/4 pension]) vs 56.3% (40 + 14.3 + 2).

[Protagoras]

I know several people who are picking up tax bills for exceeding the tax free annual allowance and they all whinge big time about the tax hit!

https://www.tax.service.gov.uk/pensi...nce-calculator - to check for the amount on which tax is payable.

In general, the amount of the pension overpayment is added to the top part of taxable income, and hence is taxed at the tax payer's marginal rate.

I was messing around with some numbers by way of example.

Assume annual fee income of £120k, at 65% salary sacrifice, so that’s £78k to pension with a tax charge on £18k. Salary would be just under £37k, so the additional £18k adds roughly £6k in tax.

At the 50% salary sacrifice level, there’s no pension additional tax charge. But the salary is increased to roughly £52.5k and about £3.6k additional NI is paid plus an additional £5k in tax.

So unless I’ve missed something, it would seem to be possible to find spots where the tax on the overpaid pension is less than otherwise paid if keeping to the limit. This is an observation, and not a suggestion.