Salary Sacrifice Rules?

[bitchstewie]

I'm seeing slightly mixed things online so can anyone confirm please if there are any hard and fast rules around salary sacrifice into a workplace pension?

From what I understand you cannot sacrifice so much that your net is below minimum wage but other that am I right in thinking that things like maximums are at the employers discretion?

[LeoSayer]

Aside from minimum wage and the pension annual allowance I'm not aware of any other roles around salary sacrifice.

Employers are generally vhappy for you to sacrifice more because it reduces their employer's NI bill.

[Pierre2k]

As I understand it, you can salary sacrifice 100% of your income. The only restriction is that it cannot exceed the maximum of £60k or your total salary - whatever is lower.

Some employers will add the NI they save to your pension contributions (mine do, but not all) so you need to consider that in the £60k total as well.

[bitchstewie]

Thanks both I haven't looked at the company handbook yet as right now this is more a "what if?" question but I didn't know if there were legal rules (outside the things mentioned) or if it was simple employers policies.

Thanks

[PistonHead007]

Minimum wage take home will almost certainly still apply.

[Pierre2k]

Admittedly, I wasn't aware of any restrictions, but a quick google does suggest that, yes, you cannot salary sacrifice to reduce income below minimum wage for your respective age group.

That said, don't know why anyone would ever want to put 'everything' into your pension anyway. At the very least you'd be best always taking the tax free £12.5k.

[LeoSayer]

Pierre2k said:

Admittedly, I wasn't aware of any restrictions, but a quick google does suggest that, yes, you cannot salary sacrifice to reduce income below minimum wage for your respective age group.

That said, don't know why anyone would ever want to put 'everything' into your pension anyway. At the very least you'd be best always taking the tax free £12.5k.

We are 5 months into the tax year so many may have already earned £12.5k.

[Sheepshanks]

Pierre2k said:

Admittedly, I wasn't aware of any restrictions, but a quick google does suggest that, yes, you cannot salary sacrifice to reduce income below minimum wage for your respective age group.

That said, don't know why anyone would ever want to put 'everything' into your pension anyway. At the very least you'd be best always taking the tax free £12.5k.

Comes up a regularly with salary sacrifice cars, typically where the lower earner of a couple wants a car that has too much impact on their salary.

[BAMoFo]

bhstewie said:

I'm seeing slightly mixed things online so can anyone confirm please if there are any hard and fast rules around salary sacrifice into a workplace pension?

From what I understand you cannot sacrifice so much that your net is below minimum wage but other that am I right in thinking that things like maximums are at the employers discretion?

My employer only allows a maximum of 7% via salary sacrifice. I put all of the remaining salary into AVCs and they don’t seem to be concerned that I earn nothing per month. They do not know that I have other sources of income so it would seem that earning above National Minimum Wage is a limitation for Salary Sacrifice contributions but not for AVCs.

[Zigster]

BAMoFo said:

My employer only allows a maximum of 7% via salary sacrifice. I put all of the remaining salary into AVCs and they don’t seem to be concerned that I earn nothing per month. They do not know that I have other sources of income so it would seem that earning above National Minimum Wage is a limitation for Salary Sacrifice contributions but not for AVCs.

The distinction between salary sacrifice and AVCs is that
with salary sacrifice you are reducing your income received from your employer, and you can’t do that if it would reduce your salary below the minimum wage.
with AVCs you have, in effect, received that salary but are choosing to divert it to your pension fund. So your employer has paid you (above) the minimum wage.

[BAMoFo]

Zigster said:

BAMoFo said:

My employer only allows a maximum of 7% via salary sacrifice. I put all of the remaining salary into AVCs and they don’t seem to be concerned that I earn nothing per month. They do not know that I have other sources of income so it would seem that earning above National Minimum Wage is a limitation for Salary Sacrifice contributions but not for AVCs.

The distinction between salary sacrifice and AVCs is that
with salary sacrifice you are reducing your income received from your employer, and you can’t do that if it would reduce your salary below the minimum wage.
with AVCs you have, in effect, received that salary but are choosing to divert it to your pension fund. So your employer has paid you (above) the minimum wage.

Thanks for the explanation regarding why the employer treats them differently. However, the AVCs are automatically paid by my employer so the end result is the same so I’m surprised that they allow it. My cynical view as to why my particular employer heavily limits the percentage that employees can salary sacrifice is because they receive a lot of work from the government.

[ooid]

If you have a DB pension, salary sacrifice might effect your retirement income. (or it used to be, someone familiar might confirm or prove me wrong!)

[Zigster]

ooid said:

If you have a DB pension, salary sacrifice might effect your retirement income. (or it used to be, someone familiar might confirm or prove me wrong!)

I’ve been involved in the design of salary sacrifice schemes for private sector companies and they always have a “notional” salary which is unaffected by salary sacrifice. That notional salary is used for pension purposes.

But I understand that public sector schemes (NHS, Teachers’, etc) have a fundamental design flaw which means that salary sacrifice does reduce pensionable salary. Off the top of my head (so could be wrong), employee contributions to those public sector schemes are paid as deductions from pay rather than salary sacrifice.

[Zigster]

BAMoFo said:

Thanks for the explanation regarding why the employer treats them differently. However, the AVCs are automatically paid by my employer so the end result is the same so I’m surprised that they allow it. My cynical view as to why my particular employer heavily limits the percentage that employees can salary sacrifice is because they receive a lot of work from the government.

Just picking up this one: I’m going for laziness from your company’s payroll team who don’t want the extra admin.

Previous governments have said they are fine with salary sacrifice. It was a while ago (so I can’t find the links) but they explicitly came out with some statements to that effect. Although who knows with the current bunch - they could easily try something daft.

I’ve worked for big consultancies that have huge amounts of income from government projects and they have always offered salary sacrifice (including sharing the employer NI saving which makes it even more tax-effective for the employee).

The thing with salary sacrifice for pensions is that it turns employee contributions into employer contributions. So if you start going after salary sacrifice pension contributions then you are, in effect going after employer pension contributions. That makes it hugely difficult when you look at defined benefit schemes, including the big public sector ones. Start charging the doctors NI on their employer’s pension contributions and see how long it takes them to go on strike.

[BAMoFo]

^^^^^ I would be very surprised if it is due to laziness within the payroll department. I work for BAE Systems and would imagine that several hundred people work in that department alone.

I doubt that I’ll ever find out what the true reason behind having such a small percentage of salary sacrifice is. However, I doubt that it is related to DB pensions because they migrated from DB provision to DC scheme nearly 25 years ago. As a result most of their workforce will not be in a DB scheme.

Edited by BAMoFo on Sunday 7th September 11:13