[Closed] Overpaying into pension, salary now below minimum wage

In my last job I was paying 100% of my wage into a pension. Nobody suggested that this wasn't allowed

does it not depend if it comes off pre or post tax?

A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage rates.

Sounds like your situation? Link

I'd speak to whoever administers it at your work to confirm.

Thanks frogstamp, that answers my question, yes it is salary sacrifice.

I note the lines...

Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

I'll chase them on Monday

I'm pretty sure it is illegal though I don't know the detail. When I had apprentices, one of them wanted to start a pension and was refused because he wasn't earning enough.

A window for change isn't unusual because Payroll will want to deal with this in one lump rather than dripping throughout the year. They might make an exception if you ask nicely.

Though, if you're happy with the arrangement and no-one else seems to care...?

I am not an accountant, however, doesn't salary sacrifice mean schemes like cycle to work and company cars, where as a pension is just savings that you'll one day get back, saved not sacrificed?

Salary sacrifice pension is definitely a thing. Can't remember the exact details now, but when ours started many years ago, it involved some sort of arrangement that effectively reduced your gross pay (thereby reducing tax, possibly also NI) and the company somehow made up the difference via the contribution. It seemed a no-brainer at the time

I used to put the last couple of months salary into a pension. Got called to hr asking my intentions and what my side hussle was. Really good way of saving if you can afford it.

doesn’t salary sacrifice mean schemes like cycle to work and company cars, where as a pension is just savings that you’ll one day get back, saved not sacrificed?

I’m sure you could google for a better explanation but salary sacrifice is where you agree to a lower salary in return for the company paying the money to something else. Could be cycle scheme, could be pension, could be something else. This doesn’t necessarily dodge tax, some benefits would be taxed as a benefit in kind.

Pension contributions can be paid in this way so the employee receives a lower salary and the employer pays the difference as an employer contribution to the pension scheme. I think this has NI advantages for both parties. Alternatively the employee makes a contribution to the pension scheme which is deducted from their salary with the advantage they don’t pay income tax on that element.

The difference between the two is likely very significant in the OP’s case. You can’t salary sacrifice yourself to under minimum wage but there is no reason why you can’t pay a part of your minimum wage salary into a pension scheme. Silly in some ways but you have to make the rules work somehow without being ridiculously hard to monitor

Also

my take home wage is now below the minimum wage.

I don’t think take home is anything to do with it, isn’t minimum wage based on gross?

You can’t salary sacrifice yourself to under minimum wage but there is no reason why you can’t pay a part of your minimum wage salary into a pension scheme.

This.

You can’t put more than a years into your pension in any one year. We had consider this as we’ve been moving savings into my wife’s pension using up previous years unused allowances.

Theres nothing to stop you taking your salary down to the NMW via salary sacrifice, then making additional payments so long as it doesn’t exceed your annual salary. You can even put in more than 40k if you for unused allowance but you’ll have to do a self assessment form to get the higher rate tax relief back.

When I had apprentices, one of them wanted to start a pension and was refused because he wasn’t earning enough.

Maybe you could have paid them a little bit more instead?

I don’t think take home is anything to do with it, isn’t minimum wage based on gross?

No, we have lots of staff who would like to use salary sacrifice for a car. They can’t because it would put them below minimum wage and they can’t take into account enhancements.

Surely that is because the enhancements are not part of gross salary they are enhancements?

Pension contributions are based on your gross salary. You can contribute all of your salary up to 40k per year if you so desire. You can be a higher rate tax payer, but not pay tax if you’re putting it into your pension. Your salary after contributing is irrelevant.

Pru is a good site for reference.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-contributions-qa/

TiRed - as stated many times on this thread, your salary is relevant if you’re making the contribution via salary sacrifice (which increases the tax saving by reducing N.I) as your employer is contractually lowering your pay, they must maintain NMW

Respectfully,

Salary sacrifice pension is definitely a thing. Can’t remember the exact details now, but when ours started many years ago, it involved some sort of arrangement that effectively reduced your gross pay (thereby reducing tax, possibly also NI) and the company somehow made up the difference via the contribution. It seemed a no-brainer at the time

Exactly this, it seems the most fruitful way - for the average risk averse joe public person - to save money currently as long as you’re prepared to wait until retirement / 57 / whatever the age is now.

Yes you can't, or aren't supposed to be able to fall below the national living wage, about 20k I recall.
I am well below this, pretty much on the threshold of paying no tax, and tried to amend again this year but the system blocked me.
They had changed providers apparently that now had this check in place.
Yes I can pay in separately and mess around claiming tax back but I really cba with that.
Bloody annoying this living wage is dictated to me by the government.
I know how much i need to live on, not them.

They must maintain NMW

But aren’t they still paying at least NMW? Say earnings are £3,000. You put all of into your pension. Taxable pay £0. Take home pay £0. Yet you’ve still been paid £3,000 by your employer?

Why does salary sacrifice of gross earnings make a difference from putting all your net pay into a pension? Except for being less efficient due to the NI payments?

I see folks are suffering from this administrative insistence, but it seems weird. I’ve not seen any constraints stated in my ‘flexible’ benefits scheme beyond the tax free contribution limit and similar.

Taxable pay £0. Take home pay £0. Yet you’ve still been paid £3,000 by your employer?

That's the nub of it. If your 'taxable pay' is zero, as far as HMRC are concerned your employer hasn't paid you anything, so you're below minimum wage and your employer is breaking the law on NMW.

What you do with your income after tax is up to you, and you could decide to put it all into a pension.

But an employer has to pay you enough up front, after any sacrifices or pension contributions deducted from gross, to meet NMW.

Decent employers / payroll schemes should have a check to stop anyone's pay falling below NMW!

But many don't - as the OP has discovered, and HMRC could well take action against the employer.

TiRed – as stated many times on this thread, your salary is relevant if you’re making the contribution via salary sacrifice (which increases the tax saving by reducing N.I) as your employer is contractually lowering your pay, they must maintain NMW

YMMV but although my % contributions are by salary sacrifice and matched by employer .... Any AVC above that are not salary sacrifice'd in.

My pension is the same. Employee contribution matched to a level. The rest I can spend on what I wish. Including AVCs as salary sacrifice. The NMW does not feature as I am choosing to spend my income and I have a further tax efficient means of saving that income.

Why would you want to invest your salary this way unless close to retirement, I would want my money much more available, not when I’m 68 !

Maybe you live on your spouse’s income and want to max your pension prior to retirement? No savings scheme offers the same return as 40% tax relief over say five years, plus growth with a 25% draw down as a lump sum on retirement.

You don't have to wait until state retirement age to access your private pension funds

Why would you want to invest your salary this way unless close to retirement, I would want my money much more available, not when I’m 68 !

Works both ways. Locked from you locked from the gov. Ie your made redundant you can access benefits that would not be otherwise accessable if it were in generic savings/ISAs/s&s.

Should be forming part of a balanced savings where possible and increasingly so as you approach your planned retirement age more so if you neglected it in your younger years.

I would want my money much more available, not when I’m 68 !

Just of note if your pension is a SIPP you can withdraw from it from 55 or 57 from 2028. I'm not sure if this is the same for other types, but its the state pension you can't receive until 67/8

You can pay 100% of your salary into a pension to save the income tax.

But you cannot use salary sacrifice to pay 100% or your salary.

To make the N.I savings (employee and and employer) your contract is amended (yes it’s slight of hand - but it’s relevant)
Hence the NMW requirements.

It DOES NOT stop anyone paying 100% of salary into a pension.