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Summary: We live off savings, don't need my salary, should I 'salary sacrifice' everything to our pension except minimum wage, for the NI savings?

We (me, wife and son) live entirely off my savings, and could easily until I can claim my pension at 55 in seven years. I earn £103,000 gross per year, we live abroad and our living costs are extremely low (until our toddler starts school, at which time we'll have a few years before savings run out).

As far as I can tell, I should contribute everything above the UK minimum wage into my pension as salary sacrifice, to save the employee NI. (I am waiting to hear if employer NI will be added to the pension or kept by my employer.)

I appreciate I will only get pension tax relief on the first £60,000, but I believe I'd get NI relief on everything, (and possibly even start claiming child benefit, although this seems gratuitous)?

The only downside would be if we decide to get a mortgage, but that definitely won't happen for four or very probably more years, if ever. The other disadvantages, eg, reduced paternity pay and life assurance, are not material for me, but anyone reading this should consider them.

Probably not relevant, we live abroad and spend only a couple weeks once every few years in the UK, but my employer insists on PAYE and me being a UK employee, so while not resident in the UK, I believe I have no choice but to be UK tax resident.

Contributing the maximum pension of £60,000 was my strategy, but I can't see any disadvantage to contributing the maximum permitted, ie, everything until I'm on minimum wage? I'll still pay NICs on the min wage.

Will I need to complete a self-assessment or will this be automatically given (provided I inform HMRC about my son, which I haven't yet)?

Thanks

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The main disadvantage of going over the annual allowance is that you end up paying tax both on the way in to the pension, and on the way out. If you also go over the lifetime allowance it gets even worse. Overall, it's likely to cost you more than just taking the taxed money in the first place, particularly if you don't get the employer NICs rebated.

If you've been a member of a pension scheme for the last few years without hitting the full annual allowance, you'll also have some carry-forward until you use it all. Make sure to work that out carefully as the allowance has changed in recent years.

If your employer allows you to vary your salary sacrifice per pay period (e.g. monthly), then you can also consider sacrificing down to minimum wage in some pay periods. Because NICs are charged per pay period rather than per tax year, and are higher on the lower slab of pay, that would save you more compared to sacrificing evenly throughout the year.

The threshold for receiving child benefit is £50K (going up to £60K soon) so if you sacrifice from £103K down to £43K you would be entitled to receive and keep it. That said, even if your employer treats you as UK tax resident, you might not actually be entitled to child benefit if you live abroad, I'm not sure.

Given you're contributing via salary sacrifice, you will automatically get full tax relief. But if you go over the annual allowance then you'll need to actually pay some of that back and I think that would have to be via self-assessment.

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  • That is extremely helpful, thank you. Mar 7 at 12:59
  • This both answers the question, I'll sacrifice slightly under 60K, my employer (of record) isn't organized enough to vary by month. It also alerts me to another mistake. I paid 63K in contributions in 2022-23, and 44K the year before, (to exhaust any rebates), so looks like I owe HMRC two self-assessments, to pay back some tax that was claimed at source. And maybe an apology - I had no idea. Mar 7 at 13:24
  • Unfortunately they'll also want interest from you since the tax will be paid late. But do check whether you have carry forward you can use from previous years before you rush to declare anything. Mar 7 at 14:01
  • Thank you. I spent many hours trying to get my head round it all and still missed this! Interest I am fine with, as long as I'm not fined. I know I've none to carry over - I was unemployed before the 2022-23 tax year, so accrued no allowance. Enormous thanks, hugely appreciated, and I hope Monica is OK. (!) Mar 7 at 14:45
  • I think if you'd had a pension scheme at all during a tax year, then you get the allowance, even if unemployed. Mar 7 at 14:47

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