Threshold Income ‘relief at source’ vs ‘salary sacrifice arrangements’

The description of calculating your Threshold income (for pension tapering), on https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057100 and https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance does not make it clear what to do with your own contributions into a workplace pension. ptm057100 contains: 1. Start with the individual’s Net income (essentially the p60 figure for most PAYE people) 2. ADD The amount that would have been employment income but for the operation of a ‘relevant salary sacrifice arrangement’ 4. DEDUCT The gross amount of member contributions paid in the tax year using 'relief at source'. The question is what is a workplace pension scheme? i.e. Is it a salary sacrifice arrangement or relief at source ? If I look at the link for relief at source (https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief) it states this is for "some workplace pensions" and "your pension provider will claim it as tax relief and add it to your pension pot (‘relief at source’)" - this sounds like a specific kind of pension scheme where companies rely on the scheme to request back 20% from HMRC If you read the salary sacrifice arrangement link (https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye), it contains: below the heading "Examples of salary sacrifice" after which there is a section called "Workplace pension schemes" containing "an employer might agree to pay more than the minimum amount required, to cover some or all of the employee’s contribution. The employee may then become entitled to a lower cash salary" Up until now, for the past few years our financial discussion community where I work, has been confused by this wording and assumed that it was indicating you should add back your own pension contributions which had lowered your income (p60 figure) It makes sense that it shouldn't be possible to flip a switch for whether tapering kicks in, by simply contributing more (sacrificing your salary) and more until your Threshold limit falls under the point where you have to consider tapering. So we've assumed the pension scheme was a valid salary sacrifice arrangement, as such we should add back our own pension contributions to the Net to calculate the Threshold income. The Adjusted income is then the addition of the company matched portion of the pension. However the worked example: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057200 contains: "Jon is an employee..." "Jon has a salary of £112.000 and as a member of his employer’s pension scheme he pays 12.5% of his salary (£14,000) as member contribution." Full worked example: calculating threshold income "Step 2 Add the amount that would have been employment income but for the operation of a ‘relevant salary sacrifice arrangement’ Jon hasn’t entered into a salary sacrifice arrangement so there is nothing to add at step 2 in respect of a relevant salary sacrifice arrangement." ...jon hasn't entered into a salary sacrifice arrangement ?! There are some online calculators which appear to match the alternative understanding. That a workplace pension is a valid way of creating a lower Threshold income and thus switching when you are supposed to apply the tapering rules. Please can you confirm?

Hi,

The maximum tax free payment into a pension scheme anyone can make in a tax year, is £40000.00 or up to their annual salary, if their annual salary is below £40000.00. A carry forward of unused pension allowance, can on occasion increase this theshold. Any payments into the pension scheme above the threshold are subject to tax and are declared in a Self Assessment Tax Return.  

For very high earners, this threshold of £40000.00 can be reduced down to £4000.00 and is called the "tapered annual allowance".

 PTM057100 is used to calculate the pension threshold where an individuals income exceeds £240000.00 in the tax year. For every £2.00 over this threshold, the £40000.00 threshold is reduced by £1.00, down to a minimum of £4000.00.  This is ""adjusted income"" and is not the same as ""adjusted net income"".  Adjusted net income is used to calculate High Income Child Benefit Charges and Personal Allowances.

A workplace pension is a way of saving for your retirement that’s arranged by your employer. Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions.  A percentage of your pay is put into the pension scheme automatically every payday. In most cases, your employer also adds money into the pension scheme for you.

You may also get tax relief from the government.  

Workplace pensions  

Where tax relief is given at source (the employer deducts the pension payment before calculating the tax due), then the pension payment should not be included in working out adjusted net income, as these payments are not taxed and have already reduced the income subject to tax. Where pension payments are made after tax is deducted, the employer can claims 20% tax relief, to add to the pension pot. Individuals who pay higher rate tax, can then claim personal pension relief, to claim a further 20% tax relief.  

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit, in this case a pension.

Thank you.

For others reading this thread, the answer above was for calculating the previous tax year (2022-2023). However if you're calculating this now to know how much tax to pay, then note that these limits have updated: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance To summarise, tapering kicks in at incomes over £260,000 and is tapering away from a new high of £60,000 as the max pension contribution. This also now only tapers down to a minimum of £10,000. Remember that the carryforward varies historically each year this changed, so you had a £40k limit last year (minus taper), etc. Using a pension calculator is probably sensible (but see below). Referring to my original message, HMRC's online examples don't match a common pension scheme used by modern industries like Meta, Google, Morgan Stanley & Apple and probably a lot more. The one I work for uses (PwC) PricewaterhouseCoopers's pension calculator which was using the wrong rules (following the alternative pension style from HMRC's docs). Our finance department helped them correct this, so this is likely now safe for everyone in these industries in calculating the correct tax owed. Note that in these higher paying industries, where you have control over your pension contribution proportion, you can't adjust your own contribution up until your taper threshold limit rises.

I have been extremely confused by this exact issue on threshold income calculation. So what is the conclusion - do employee contributions made through salary sacrifice reduce your threshold income or not? The HMRC examples seem to suggest that salary sacrifice contribution do NOT reduce your threshold income whereas other forms of contribution (eg. the Jon example above) do reduce your threshold income. Similarly, if I contribute to a SIPP, it would reduce my threshold income. But if I contribute via salary sacrifice, it gets added back and doesn't reduce my threshold income. In both cases, my personal contribution is the same and it has the effect of reducing my taxable income (and take home pay), so I don't understand why they are treated in completely opposite ways? Please could you clarify? Regards 

In Removed Admin .

Hi hmrccommunity-JC

If salary sacrafice the pension contributions have already been taken from your salary before tax calculated so not able to deduct again. 

Thank you