Salary Sacrifice schemes and annual pension contribution limits

[EasilyConfused]

I contribute to my firms DC plan, and they operate 'salary sacrifice'. I don't recall it being offered as an option, was just the way they manage payrolls.

I'm coming close to when I would like to retire, so decided to maximise my pension contributions up to the £40k pa limit to qualify for tax relief.

It just dawned on me that I may have an issue with the other half of the rule - 'no more than earnings for the year'.

My question - is it that no more than Base Pay or Gross Pay?

As a simplified example, say my base salary is £50k and combined self and employee pension contributions are £40k (£30k my contribution, £10k employer).

If it's based on base salary, or I were not placed on a salary sacrifice arrangement, all is well. I have contributed no more than earnings and no more than £40k.

If however it is based on gross, I have lost out by use of salary sacrifice as after sacrificing £30k my gross is reduced to just £20k, so making £10k no longer tax free.

Which is it please? Obviously hoping the former.

If it is that you can save no more than gross after salary sacrifice, then it's a considerably worse option for those in my position, of which I would have thought there would be many like me?

Would appreciate good news, or if not, at least to know so I can ask my employer to exclude me from their salary sacrifice arrangement (assuming they will) so I don't expose myself to avoidable tax next year.

[JohnB]

I'm not quite such I follow your argument, but when I did salary sacrifice I got £38k total paid into a pension, and was paid minimum wage, some £12k, and added another £1600 which was topped up to £2k. So total contributions £40k, and all was fine, which I think is just a more extreme example of what you are saying.

[mearnsfool]

Your base salary, your example £50k less your salary sacrifice £30k is what HMRC gets reported to it that is £20k.

Therefore as far as HMRC is concerned they work on £20k less your personal allowance plus add to that let's say any things like heath insurance your company gives you to work out taxable pay.

[JohnB]

I'm not sure that's relevant. The £20k+non-pension benefits may be taxed, but does not become the limiting factor for pension contributions. I find the Aviva calculator very useful to try different scenarios. http://www.aviva-for-advisers.co.uk/adv ... y-exchange

[stewamax]

...and a warning for those lucky to be in a DB (final salary) rather then DC scheme: the final salary on which your DB is calculated will likely be based on your reduced pay after salary sacrifice. When I joined a large and well-paying private company in 1981, the advice HR gave me on joining was simple: pay as much voluntary contributions as you can, pay as much salary sacrifice as you can (there were uppers limits for both), and if you are still working for us on your 49th birthday come out of salary sacrifice then.

[ursaminortaur]

...and a warning for those lucky to be in a DB (final salary) rather then DC scheme: the final salary on which your DB is calculated will likely be based on your reduced pay after salary sacrifice. When I joined a large and well-paying private company in 1981, the advice HR gave me on joining was simple: pay as much voluntary contributions as you can, pay as much salary sacrifice as you can (there were uppers limits for both), and if you are still working for us on your 49th birthday come out of salary sacrifice then.

Many DB schemes get around this by introducing the idea of a notional or reference salary - equated to the salary before salary sacrifice - which the DB final salary pension is calculated against.

https://www.telegraph.co.uk/finance/personalfinance/investing/2804183/Make-sure-that-salary-sacrifice-works-out-for-you.html

Employees must be vigilant to ensure that other salary-linked benefits do not fall along with the salary. Companies can get round this by introducing a so-called "notional" or "reference" salary. Future wage increases, overtime and bonuses are all calculated using this notional salary.
In other words, if you are earning £35,000 and you are asked to reduce your salary by 10 per cent to £31,500, your benefits should be calculated as if you were earning £35,000, otherwise you will lose out.
"Careful account needs to be taken of all pay-related benefits to ensure they are not reduced by the salary sacrifice. Items like overtime, shifts etc may be calculated by reference to the basic rate. The best way of dealing with these is for it to be established that they will continue to be calculated, both immediately and in the future, by reference to what the income would have been had the salary sacrifice not taken place," says an Amicus spokesperson.
"Where members are in defined benefit pension schemes, where the amount of pension is defined by reference to final salary, then a similar safeguard needs to be introduced. Otherwise, there could be a big impact both on the value of past and future service pension entitlements."

If that hasn't been done then your idea of dropping salary sacrifice in the years immediately before retirement would work but many DB schemes now have either already moved to or will shortly move to being career average which would scupper that idea.

[Kantwebefriends]

say my base salary is £50k and combined self and employee pension contributions are £40k (£30k my contribution, £10k employer).

Hang on, you haven't made a contribution. You have accepted a lesser salary so that your employer will make a bigger contribution to your pension plan than he otherwise would have done. He has contributed £40k, using up your Annual Allowance. If you want to make a contribution of your own to (say) a personal pension you'd need to carry forward unused Annual Allowance from the previous three years. Your actual annual earnings are £20k so if you have £20k or more of unused carry forward available you can contribute the £20k as desired.