SIPP with umbrella

[eek]

Hi eek,

Sorry if I'm misunderstanding, but the Ee'rs NI has always been paid to HMRC, and this has never changed.


Kind regards

Zeeshan

From Employer Pension Contributions & Tax Relief | HL

• Business owners and directors – If they are an employee of the company, contributions to their pensions can be offset against corporation tax. Unlike salary, pension contributions are exempt from National Insurance of 13.8%.

And unless I'm very mistaken 13.8% is Employers NI...

[Amanensia]

The whole point of salary sacrifice is that the amount sacrificed is no longer "salary". Any amount paid into a pension by way of a genuine salary sacrifice should NOT be subject to NI - employee or employer. The amount sacrificed becomes an employer's contribution to the employee's pension. That's the whole reason salary sacrifice is a thing.

Typically, for non-contractors, the employer will increase the amount of the pension contribution to allow for the fact that they are now saving employer's NI on that amount. That might be by the full amount of employer's NI, or a lesser amount. If an umbrella is set up to permit salary sacrifice they should not be retaining the employer's NI saved - either to pay it to HMRC (which would be completely ridiculous) or to retain it themselves as pure profit (which would be dodgy as hell.) It may be reasonable for the umbrella to retain a small amount of the amount saved to reflect their administrative costs.

I'm not suggesting any umbrella being discussed here is doing anything dodgy - I'm sure there's just a communication issue.

[DolanContractorGroup]

From Employer Pension Contributions & Tax Relief | HL


And unless I'm very mistaken 13.8% is Employers NI...

Thanks eek.

Yes, there is no disagreement with the guidance. I understand your point. The calculation the system does deducts the margin, sets aside NMW/NLW amount, works out the Ee'rs NI amount (and other employment costs like Ee'rs pension contribution) on the gross amount and allocates at the same time. Increasing or decreasing the salary sacrifice items also increases or decreases the Ee'rs NI at the same time too.

I can PM you an example payslip, if that helps.

EDIT: I think the confusion can stem from trying to explain it in a step by step process, whereas the system calculates everything at the same time, with one change affecting all the other variables.

Kind regards


Zeeshan

[eek]

Thanks eek.

Yes, there is no disagreement with the guidance. I understand your point. The calculation the system does deducts the margin, sets aside NMW/NLW amount, works out the Ee'rs NI amount (and other employment costs like Ee'rs pension contribution) on the gross amount and allocates at the same time. Increasing or decreasing the salary sacrifice items also increases or decreases the Ee'rs NI at the same time too.

I can PM you an example payslip, if that helps.

Kind regards


Zeeshan

There is no need - It's incredibly unlikely I will ever need an umbrella company.

My only reason for posting was that your information seemed to be incredibly unclear for something that can be far easily explained and every time anyone asked a question you seemed to increase the confusion rather than simplifying things. The fact you talk about systems seems to confirm my concern that you don't understand the basis of the available options.

[DolanContractorGroup]

Typically, for non-contractors, the employer will increase the amount of the pension contribution to allow for the fact that they are now saving employer's NI on that amount. That might be by the full amount of employer's NI, or a lesser amount. If an umbrella is set up to permit salary sacrifice they should not be retaining the employer's NI saved - either to pay it to HMRC (which would be completely ridiculous) or to retain it themselves as pure profit (which would be dodgy as hell.) It may be reasonable for the umbrella to retain a small amount of the amount saved to reflect their administrative costs.

Hi Amanensia,

Yes, agreed.

Any Ee'rs NI "saved" because of a larger allocation of the umbrella income to the employee's pension contribution just means that this saving goes into that contribution too.

Kind regards


Zeeshan

[DolanContractorGroup]

There is no need - It's incredibly unlikely I will ever need an umbrella company.

My only reason for posting was that your information seemed to be incredibly unclear for something that can be far easily explained and every time anyone asked a question you seemed to increase the confusion rather than simplifying things. The fact you talk about systems seems to confirm my concern that you don't understand the basis of the available options.

Apologies eek. Maybe my explanation would have been clearer on the phone.


Kind regards

Zeeshan

[lucyclarityumbrella]

My only reason for posting was that your information seemed to be incredibly unclear for something that can be far easily explained and every time anyone asked a question you seemed to increase the confusion rather than simplifying things.

Simples... all tax and NI contributions decrease with salary sacrifice pension does that help?

[mogga71]

Hi Amanensia,

Yes, agreed.

Any Ee'rs NI "saved" because of a larger allocation of the umbrella income to the employee's pension contribution just means that this saving goes into that contribution too.

Kind regards


Zeeshan

I think the best way to clear this up for us all is with an example....if that's ok with you Zeeshan.

2 people pay £45,000 each into your Umbrella on 6th April.

1st person says put it all into PAYE ..... which will likely have to include standard small pension payment.
2nd person says put £40k into Pension as salary sacrifice and rest in PAYE.

Is it possible to give us a breakdown for both people.

That would be grand and very helpful.

[eek]

I think the best way to clear this up for us all is with an example....if that's ok with you Zeeshan.

2 people pay £45,000 each into your Umbrella on 6th April.

1st person says put it all into PAYE ..... which will likely have to include standard small pension payment.
2nd person says put £40k into Pension as salary sacrifice and rest in PAYE.

Is it possible to give us a breakdown for both people.

That would be grand and very helpful.

That's not a great example - £5k a month every month would be easier and I'm going to use a £95 fee as I'm stealing the first calculation

If you maximise PAYE you get

Monthly Income        £5,000.00
Total All Tax           £1,654.13
Margin                        £95.00
Total Net Income    £3,250.87

Tax calculations are

Employer National Insurance
£504.96

Employment Tax
£21.89

Employee National Insurance
£417.98

Employee Tax
£709.29

For the salary sacrifice bit we need to work backwards and first work out the lowest amount the agency must legally pay:

Your salary needs to be at least £8.72 (min wage) * 35 (hours) * 4.33 (weeks per calendar month) or £1321.51 a month before employee taxes

Monthly min pay £1321.51
Income tax        £55.80
Employee NI       £72.30

Net take home    £1193.42

And going the other way to get the employer tax payments

Salary             £1321.51
Employers NI      £83.15
Employment tax    £3.33
Margin                £95.00

Total paid out  £1502.99

amount left     £3497.01 paid into the pension

which breaks down to

£5000 received by the umbrella
£1193.42 Net income
£3497.01 pension
£ 214.58 paid in tax (between the 5 bits)
£  95.00 to the umbrella

So via PAYE you keep £3,250.87 of your £5,000 contract fee, maximising salary sacrifice into your pension you keep £4690.43 of it. And the reality will be somewhere in between those 2 figures.

Annually it's

PAYE £39010.44 from £60,000
Pension £56385.16 from £60,000

£41974.12 into the pension (yes I know it's above the threshold but it's an example)
£14321.04 to spend.


When the public sector rules kicked in I joked that it made sense for me to do a 3 month inside IR35 contract ever year, looking at those figures it definitely does.

[mogga71]

That's not a great example - £5k a month every month would be easier and I'm going to use a £95 fee as I'm stealing the first calculation

If you maximise PAYE you get

Monthly Income        £5,000.00
Total All Tax           £1,654.13
Margin                        £95.00
Total Net Income    £3,250.87

Tax calculations are

Employer National Insurance
£504.96

Employment Tax
£21.89

Employee National Insurance
£417.98

Employee Tax
£709.29

For the salary sacrifice bit we need to work backwards and first work out the lowest amount the agency must legally pay:

Your salary needs to be at least £8.72 (min wage) * 35 (hours) * 4.33 (weeks per calendar month) or £1321.51 a month before employee taxes

Monthly min pay £1321.51
Income tax        £55.80
Employee NI       £72.30

Net take home    £1193.42

And going the other way to get the employer tax payments

Salary             £1321.51
Employers NI      £83.15
Employment tax    £3.33
Margin                £95.00

Total paid out  £1502.99

amount left     £3497.01 paid into the pension

which breaks down to

£5000 received by the umbrella
£1193.42 Net income
£3497.01 pension
£ 214.58 paid in tax (between the 5 bits)
£  95.00 to the umbrella

So via PAYE you keep £3,250.87 of your £5,000 contract fee, maximising salary sacrifice into your pension you keep £4690.43 of it. And the reality will be somewhere in between those 2 figures.

Annually it's

PAYE £39010.44 from £60,000
Pension £56385.16 from £60,000

£41974.12 into the pension (yes I know it's above the threshold but it's an example)
£14321.04 to spend.


When the public sector rules kicked in I joked that it made sense for me to do a 3 month inside IR35 contract ever year, looking at those figures it definitely does.

Many thanks eek ... that is really, really helpful. Of course the real beauty is that as long as you are in the Pension scheme in this calendar year (2019-20) and have not paid into it this year, you can pay into next years (2020-21) using SS and then afterwards utilise the 2019-20 £40k amount too if you wish.

Thanks again....and I understand that the figures may not be 'spot on'.

Zeeshan and Lucy ... do you both roughly agree with these figures?