Increasing Pension Contributions

[Supersuperleeds]

Totally confused now, my company uses salary sacrifice as well.
Apart from the extra going into my pension pot what advantage reference NI is there, surely when it goes up I'll still be paying the extra? Or is it that because I now have less to be taxed on the increase will be less?

Employee NI is only paid on salary, with the salary sacrifice you reduce your salary so pay less NI. The more you sacrifice the more NI you will save.

If you increase your pension contributions, your take home pay will go down.

 

[Jenkins]

I'm looking to reduce my pension contributions to zero and also pay less tax next April - by taking early retirement.

 

[Deleted User]

Employee NI is only paid on salary, with the salary sacrifice you reduce your salary so pay less NI. The more you sacrifice the more NI you will save.

If you increase your pension contributions, your take home pay will go down.

I understand that bit but I thought NI was worked out on gross pay, is it salary sacrifice that makes it on net then?

 

[Supersuperleeds]

I understand that bit but I thought NI was worked out on gross pay, is it salary sacrifice that makes it on net then?

Salary sacrifice reduces your gross pay, you in effect take a reduced salary in exchange for your employer paying more into your pension.

 

[Deleted User]

Salary sacrifice reduces your gross pay, you in effect take a reduced salary in exchange for your employer paying more into your pension.

Cheers.

 

[Saluki]

I am quite astonished at how much people can put in, and how much their employer contributes too.
If I put in 7.5% of my salary, the company will match it. If I put in 10% the company will only put in 5%. I double checked this with payroll and they confirmed it so I have a separate pension pot and put into that instead.
very late to this pension thing as i didn’t start a pension pot when younger as I was very low waged and needed to do frivolous things like pay the rent and eat. Being a carer for 14 years didn’t help much either.

I will have a chat to my tame accountant, who is all over these things, and see what he advises.

 

[Arrowfoot]

It is gross but a Smart (salary sacrifice) pension contribution means your gross pay is reduced.

Let’s say your normal salary is £30,000 and you want to contribute £5,000 to your pension. The employer agrees to pay this for you but your gross salary is reduced by the same amount. Your gross salary is now £25,000 and both your and your employer’s NI contributions are thereby reduced.

Its salary sacrifice…therefore reducing my gross pay, therefore paying less tax and NI………


Do you pay NI on pension contributions salary sacrifice?

The amount you sacrifice on your salary isn't subject to income tax or NI contributions. This saves you a bit extra, since standard pension tax relief only repays income tax and doesn't include NI.

@jowwy is correct, you save NI on the sacrificed amount.

Apologies. Yes, salary sacrifice is not part of the gross.

 

[Deleted User]

I am quite astonished at how much people can put in, and how much their employer contributes too.
If I put in 7.5% of my salary, the company will match it. If I put in 10% the company will only put in 5%. I double checked this with payroll and they confirmed it so I have a separate pension pot and put into that instead.
very late to this pension thing as i didn’t start a pension pot when younger as I was very low waged and needed to do frivolous things like pay the rent and eat. Being a carer for 14 years didn’t help much either.

I will have a chat to my tame accountant, who is all over these things, and see what he advises.

It's unusual for a company to reduce the amount they put in when you increase yours?

A bit naughty that.

 

[johnblack]

I’m currently putting in 10% and the company put in their max of 9%. I also put in my annual bonus which saves an amazing amount of tax. I’m going to up mine by another 5%pm as the returns are far better than any savings account and it’s far more tax efficient.

 

[Lozz360]

I am quite astonished at how much people can put in, and how much their employer contributes too.
If I put in 7.5% of my salary, the company will match it. If I put in 10% the company will only put in 5%. I double checked this with payroll and they confirmed it so I have a separate pension pot and put into that instead.
very late to this pension thing as i didn’t start a pension pot when younger as I was very low waged and needed to do frivolous things like pay the rent and eat. Being a carer for 14 years didn’t help much either.

I will have a chat to my tame accountant, who is all over these things, and see what he advises.

So what you are saying is, the more pension you pay, the less your employer pays? You pay 7.5% employer matches it, result is 15% contribution. You increase your payment to 10%, employer reduces theirs to 5%, result is still only 15%. That doesn’t sound correct or even legal. Your employer is effectively pocketing your additional 2.5% payment!

 

[Lozz360]

I’m currently putting in 10% and the company put in their max of 9%. I also put in my annual bonus which saves an amazing amount of tax. I’m going to up mine by another 5%pm as the returns are far better than any savings account and it’s far more tax efficient.

Absolutely. Pensions are a very tax efficient way of saving. Nobody has mentioned in this thread yet that your pension contribution gets 25% added to it by the government (this is in addition to the tax and NI reduction on any salary sacrifice scheme plus any employer contribution increase). Then, assuming you are paying into a defined contribution pension, you can withdraw 25% of it, tax free!

 

[Lozz360]

turns out that, although I have over 40 years of NI contributions I will not currently be entitled to a full state pension - as my scheme was 'contracted out' I need to pay several thousand to get the contribution back up.
I also need to keep paying for the next 5 years in spite of being retired

It is not unusual to be contracted out of some your state pension. The chances are, that you will be getting a better return from the pension that this amount was contracted into (most likely a final salary scheme). Have you checked your pension forecast using the government portal? https://www.gov.uk/check-state-pension

Are you sure you need to “pay several thousand to get the contribution back up.”? Normally, when contracted out, the pension forecast tells you that you cannot increase your SP. It does on mine.

 

[Saluki]

So what you are saying is, the more pension you pay, the less your employer pays? You pay 7.5% employer matches it, result is 15% contribution. You increase your payment to 10%, employer reduces theirs to 5%, result is still only 15%. That doesn’t sound correct or even legal. Your employer is effectively pocketing your additional 2.5% payment!

This is how payroll explained it. It didn’t sound right to me but I had other things on my mind at the time and failed to revisit it. She said they would match up to 7.5% and, if I chose to pay more they would contribute the difference between why I pay & 15%.
Academic now anyway, for this firm as notice is in and I start a new job soon.

 

[PaulSB]

It is not unusual to be contracted out of some your state pension. The chances are, that you will be getting a better return from the pension that this amount was contracted into (most likely a final salary scheme). Have you checked your pension forecast using the government portal? https://www.gov.uk/check-state-pension

I don't know the current rules but it used to be that if the contracting out provider could not offer a better return the law required they inform the customer of this and provide the option to contract back in.

Are you sure you need to “pay several thousand to get the contribution back up.”? Normally, when contracted out, the pension forecast tells you that you cannot increase your SP. It does on mine.

The amount required will vary according to the individual circumstances. The term "fully paid up" can lead to misunderstanding. It's my understanding if one retires before state pension age the intervening years are not "paid up." An individual retiring at 60 with a state pension age of 67 can show all contributions are fully paid for the years he/she worked however for the years between 60 and 67 no contributions are paid.

There is also an illustration "You can improve your forecast" and shows the maximum the individual can achieve. Looking at this option one can view one's contribution record and those which are not paid through not working past 60, if this was the retirement age, will show as "year is not full." The amount to pay and the date by which it must be paid is also available.

I've done this a couple of times for my wife and it is always the years since she retired which show as unpaid and with every year that goes by that year is added. In my view paying up the contributions is a no brainer. In my wife's case it will give a 41% return on investment for life after the capital sum is repaid. Obviously one has to be sure of living long enough to at least repay the capital investment.

 

[Low Gear Guy]

I think the above applies to the old state pension. The new state pension requires 35 years of NI contributions for a full pension with no benefit from additional years. And no state pension unless you have paid in for at least years.