I just started a new job with a defined contribution pension plan that uses salary sacrifice. The company contributes the basic 3% (which seems to be the standard in my industry).
I wanted to contribute 15% myself on top of the employer’s 3%, but I found out they cap employee contributions at 10%. I’ve never seen this before and it feels like they’re limiting employees who want to save more responsibly for retirement. With just a 13% total contribution, I feel like it’s not enough, especially since I started saving for retirement later (I’m 37 now) and need to catch up.
Here’s where I’m puzzled:
Why would a company impose this cap? What could be the downside for them to allow more salary sacrifice?
I’m thinking of putting the extra 5% in my SIPP (I use Vanguard after consolidating my old pensions). I’m a higher rate taxpayer (earning £96k), so I know I’ll get the 20% tax relief automatically and have to claim the extra 20%. So…
How much do I need to contribute from my net pay to equal 5% of my gross pay after 40% tax relief?
What’s the process for claiming the extra 20% back? What documents should I keep throughout the tax year to make it easier?
You should try bringing this up with a senior manager. With employer NI going up soon, salary sacrifice will actually benefit companies more. They might reconsider.
Reeve said:
You should try bringing this up with a senior manager. With employer NI going up soon, salary sacrifice will actually benefit companies more. They might reconsider.
Good point - I’ll definitely mention that, thanks.
About the cap - they might just want a simple rule to avoid any issues with employees dropping below the minimum wage. My company doesn’t let us use bonuses for salary sacrifice either, but I’m planning to question that. Salary sacrifice saves companies a lot on NI costs.
Dior said: @Skyler
I had no idea that you couldn’t go below minimum wage with salary sacrifice, but I guess it makes sense.
I did salary sacrifice to the minimum wage last year, but when the rate went up, I had to lower my sacrifice amount. I suggested they just raise my salary to match, but that didn’t go over too well.
@Jesse
I get where you’re coming from, but with salary sacrifice, you’re just choosing to take less in cash. Doesn’t tax sometimes take you below the minimum wage anyway?
PushaTitan said: @Skyler
Could you explain the ‘fiduciary duty’ angle? Is it that they’re supposed to help the company save money when it’s legal to do so?
Exactly, but the duty is toward the company owners. Avoiding thousands in costs just because HR doesn’t want the extra work (which might only be a few minutes per employee) doesn’t really help the company.
@Skyler
It’s often more tax-efficient to take a bonus as income because NI is lower on larger single payments. You could increase salary sacrifice temporarily in following months if you want the bonus amount in your pension.
@Bell
Good point. In my case, it’s a retention bonus that follows a redundancy notice, so my only safe option is getting it into my pension. If they won’t allow it, I’ll do it through my SIPP and pay a 2% NI fee.
