Pensions in work - Does it matter if I opt for my contribution to be taken before or after deduction

[DJMK4]

Hi all,

As above really, I am filling in a form and the question asked is that do I want my % or amount contributions to be taken out before or after my deductions? what is the difference or benefits here? does it matter? is there some sort of tax relief I am missing here in doing it one way or another?

Not too clued up on pensions, or tax in fact.

 

[Shelster]

I have mine taken out before any deductions.

Means that you are paying less tax and NI on your wage as the contributions / deductions for them are made after all pension deductions are taken out.

Bit of a win win really.

Reminds me, must look at upping my contributions at some point in the near future

 

[LeeUK]

Having them taken out before deductions means your employer pays less employer NI too. Which I see as dodgy.

 

[DJMK4]

Great, thanks for this I think I will do this

 

[The_Abyss]

Hi all,

As above really, I am filling in a form and the question asked is that do I want my % or amount contributions to be taken out before or after my deductions? what is the difference or benefits here? does it matter? is there some sort of tax relief I am missing here in doing it one way or another?

Not too clued up on pensions, or tax in fact.

There's little difference to you other than 'before deductions' is a salary sacrifice arrangement and 'after deductions' is a more traditional contribution.

Both are tax relievable but the former also saves on NI (and saves your employer too), meaning you benefit a little more.

 

[Pudney]

Having them taken out before deductions means your employer pays less employer NI too. Which I see as dodgy.

Why?

 

[The_Abyss]

Why?

Salary sacrifice, as a concept to pay for a number of things (pension contributions, childcare, car leasing, bicycle purchase etc etc) is coming under increasing scrutiny as it reduces the amount of NI paid. It is legal, known and accepted, but has questionably exceeded use of the original intention.

Several think tanks have questioned whether it should continue in the current form.

 

[Pudney]

Salary sacrifice, as a concept to pay for a number of things (pension contributions, childcare, car leasing, bicycle purchase etc etc) is coming under increasing scrutiny as it reduces the amount of NI paid. It is legal, known and accepted, but has questionably exceeded use of the original intention.

Several think tanks have questioned whether it should continue in the current form.

Hahahahahahahahahahahahahah

 

[LeeUK]

Why?

I'm think because at the end of the day you and your employer will have paid less NI which could effect future state benefits.

This might not be a problem if you're on a big salary, but to the average working class just trying to get by.

But maybe I'm wrong as I haven't fully read up on the subject yet.

 

[Hades]

Salary sacrifice, as a concept to pay for a number of things (pension contributions, childcare, car leasing, bicycle purchase etc etc) is coming under increasing scrutiny as it reduces the amount of NI paid. It is legal, known and accepted, but has questionably exceeded use of the original intention.

Several think tanks have questioned whether it should continue in the current form.

As far as I can see it is a legitimate form of government tax incentive to encourage people to invest in their pension, to cover childcare (to help them return to work) and to cycle to work (can't see any benefit in the car leasing though).

 

[The_Abyss]

Hahahahahahahahahahahahahah

Enlightening post but sorry, it is lost on me.

 

[The_Abyss]

As far as I can see it is a legitimate form of government tax incentive to encourage people to invest in their pension, to cover childcare (to help them return to work) and to cycle to work (can't see any benefit in the car leasing though).

Yes, it is entirely legitimate however as with most Government policy the scope and loopholes are inevitably stretched and the end original objective is missed.

Income tax relief at the individual rate is under severe pressure now and will likely be reformed (and implemented) in the next 5 years. Salary sacrifice will be reformed along with it.

 

[Richie]

If they do remove the tax relief on pension contributions, will they then remove the tax paid on pension income when you retire or does it mean you will be double taxed?

 

[Columbo]

Having them taken out before deductions means your employer pays less employer NI too. Which I see as dodgy.

My employer is taking that saving and adding it to the employees contribution which makes it a decent little scheme and at least gives some incentive to the employee to join.

 

[jon86]

My employer is taking that saving and adding it to the employees contribution which makes it a decent little scheme and at least gives some incentive to the employee to join.

My previous employer offered that. It equated to 8% employer contribution instead of 7%. My new employer doesn't offer it though.

 

[grumpysculler]

I'm think because at the end of the day you and your employer will have paid less NI which could effect future state benefits.

This might not be a problem if you're on a big salary, but to the average working class just trying to get by.

But maybe I'm wrong as I haven't fully read up on the subject yet.

It would only affect benefit entitlement if salary sacrifice reduced you to below the LEL (currently £109 a week). There is no benefit to the employee of salary sacrifice below the PT (currently £149 a week).

 

[toasteh]

If they do remove the tax relief on pension contributions, will they then remove the tax paid on pension income when you retire or does it mean you will be double taxed?

The way I understand it, as the pension contribution is made before tax you aren't therefore taxed on it anyway. So rather than having the basic (and higher) rate thresholds increased by the grossed up amount of the contributions you just don't pay income tax on the contributions and they don't get grossed up.

 

[The_Abyss]

If they do remove the tax relief on pension contributions, will they then remove the tax paid on pension income when you retire or does it mean you will be double taxed?

Pensions are EET - Exempt of tax on the money going in, Exempt of tax on the money whilst it is in there (there's a little still, thanks to Gordon Brown), but Taxable on the money coming out (aside from the PCLS, or tax free cash).

As a comparison, ISAs are generally the opposite - TEE - you get the drift.

Fyi tax relief on pension contributions is not up for change, but rather the amount of it is. Pensions work best for those who are higher rate tax payers when they contribute but who are basic or lower rate tax payers when they take their benefits. The shifting sentiment is towards limiting the amount of tax relief available, as higher rate tax payers benefit the most (they also pay the most tax, but that's probably for another thread )

Tax relief on pension contributions is likely, over time, to be reformed to either a set level (perhaps 25%) or to be capped at the basic rate of income tax.

It is extraordinarily unlikely that the rate of tax paid when taking your benefits at retirement will be changed from the current system. Although politicians love kicking the can down the road and leaving problems for the next generation to sort out, giving a huge income tax break to the fastest growing population demographic just isn't sustainable.