In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at [email protected].
Question: I am currently automatically enrolled into my workplace pension through salary sacrifice, an arrangement which works well for me as it’s simple and saves me money on national insurance (NI) contributions. Are these sorts of arrangements likely to continue given the dire financial situation the chancellor finds herself in?
Answer: As your question alludes, “automatic enrolment” rules require all employers, by law, to enrol all qualifying employees into a workplace pension scheme that meets certain minimum standards.
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As I’ve covered in this column previously, the minimum total contribution from both employers and employees for workplace pensions is 8 per cent (with a minimum of 3 per cent from your employer and 5 per cent from the employee including upfront tax relief) of earnings between £6,240 and £50,270, although many firms offer more generous terms.
To qualify for auto-enrolment, you need to be aged 22 to 66 (state pension age) and earning at least £10,000 per year.
Those who fall outside these parameters are still allowed to opt into their company pension scheme on the same terms, but they may not be automatically enrolled.
Different pension schemes will receive your contributions in different ways, but in most cases, you should still get the tax relief you are entitled to, making your pension contributions tax-free.
If you are in a “net pay” pension scheme, your personal contributions are taken from your salary before income tax has been paid. Provided you are earning above the personal allowance of £12,570 per year, after your pension contributions have been deducted, if you are in a net pay scheme, you should receive all of your tax relief automatically.
However, if your annual salary is less than £12,570 (after pension deductions), you may not receive your tax relief automatically. Anyone in this position should speak to their employer and their pension scheme to discuss their options.
The other main way to receive tax is relief at source. If your pension scheme operates in this way, you pay contributions from your taxed salary, and you will receive basic-rate tax relief automatically, regardless of your income tax band.
If you are a higher or additional-rate taxpayer and are entitled to extra tax relief, you can claim this from HMRC. Your extra tax relief will usually be paid to you via an adjustment to your tax code in the following tax year.
Salary sacrifice
Some employers, including yours, may also offer to pay pension contributions on your behalf via “salary sacrifice” (on top of their normal contributions). This involves giving up a portion of your salary, with your employer instead paying you a “non-cash benefit” – in this case, pension contributions.
This will mean you get your pension tax relief upfront, while also reducing employee and employer NI contributions. In some cases, your employer may share some or all of the NI benefit they receive with you. The ability to reduce NI costs makes salary sacrifice an attractive employee benefit for many firms.
One thing to bear in mind when considering salary sacrifice is the impact it might have if you are made redundant. As your salary will be reduced, it is possible your redundancy entitlement will be reduced too. Taking a lower salary could also affect things like maternity and paternity pay, mortgage applications and some state allowances.
In terms of the future of salary sacrifice, the Government has never said it plans to scale back or even abolish these arrangements, although HMRC did commission an independent report to assess reform options, including removing the provision of NI relief.
As with most tax benefits, there will inevitably be rumour and speculation ahead of the Budget, but if there are any changes, these should only affect future contributions to salary sacrifice arrangements.
Any reform along these lines would also likely face significant pushback from employers who have already had to deal with rising costs following the hike in employer NI rates.
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