AIBU to put money in pension as I get WTC?

[Snowcosmia]

I'm self employed (care & gardening) with low profits and currently receive Working Tax Credit. I had to take some time off this year due to a minor injury at work. This made me realise how vulnerable I am to injury through lone care work so I have started developing the gardening more which has had some extra costs so less overall profit than last year (but much better long term prospects).

To my surprise I recently got a refund from a very old mis-selling thing which included a payment of interest. As I understand it the interest is rightly counted as income for tax and Working Tax Credit.

I want to put half this payment into my very tiny pension savings which I haven't added to for years. Although it wasn't the plan the other half more or less covers the cost of the extra equipment and unpaid time off due to injury.

Once everything is added together my income for Tax/Tax Credits will be higher than last tax year.

AIBU to put money into the pension considering it reduces my taxable income? My childcare costs will be going down when DC starts school in September.

(Or have I misunderstood the system?)

I very much doubt it's classed as income, as you have not earned it .Inheritance , prize winnings , gifts etc are not . So check that out.

I know what you mean MyDcAreMarvel the refund doesn't count but the interest does count apparently. Tbh it's a godsend this year but I'm a bit worried it could reduce my WTC drastically from April because it makes it look as if my normal income's much higher than it really is.

Not complaining I promise, I'm really hopeful the gardening will work out better.

I don't think it's the interest that they owe you on the miss selling that counts. As far as I am aware it interest in your savings over £300.
So if you are owed 5k , £3500 plus £1500 interest for example am pretty sure it's just classed as 5k which would generate less that £300 a year once you receive it.

To get back to your original question though, yes it's fine to put it in your pension. Both legally and also morally imho.

Interest from savings is, I'm not convinced that interest owing to you because of a payout is. And anyway, isn't it just the first£300 of interest ignored anyway?

But if you're unsure then I would definitely put it in your pension. We did that once with a redundancy payout.

I will definitely check that out, maybe it doesn't count in the circumstances

Thank you for the moral encouragement, it just seems like the most sensible thing to do as it's money I wasn't expecting at all and I won't miss it IYSWIM

Of course put it in your pension. As much as possible!

In my experience tax credit helpline staff do not always have the in depth knowledge to be able to give you the correct information. I would read the guidance online very carefully and decide for yourself. Quite frankly, unless they check your claim then they won't know about it as it is not taxable so won't show on your p60.

Thank you reallybadidea . The only reason not to put it into my pension would be if I was still treated as having it and ended up with next to nothing to live on.

I can't see that any differential will be made regarding the source of the interest - effectively it IS interest on savings, the savings being the capital which is also being returned to you.

Anyway, the rules are as they are and allow for pension contributions to reduce your income for tax credit purposes, you are therefore fully complying with the rules and this is just good tax planning, no different to putting savings into an ISA to take advantage of those tax rules.

The first 1000 of savings income is tax free for a basic rate tax payer. Reduced to £500 for a higher rate tax payer. Either way it's perfectly legitimate tax planning to put it into a pension.

HMRC are pretty joined up now and whole this interest would of course not show on a P60 (as that's a summary of employment income) it will have been notified to HMRC and they have the systems in place to link it to the OP's tax account.

I can't see that any differential will be made regarding the source of the interest

Because it's not interest anymore as it forms part of the capital.

So how come they need you to tell them how much you've put in a personal pension when you fill in the renewal - surely they have that information too?

And surely you could argue that the interest which was paid represents x number of years' interest and so the OP should be entitled to a £300 disregard for each of those years, rather than just the tax year in question?

If it's similar to a PPI refund, the repayment is not taxable but the interest definitely is and needs to be declared on your self assessment tax form. I had to put it on my one last year , and I don't think it's changed since then.

No the interest is added to the lump sum that you're owed. So it's different from any interest which you would get from savings which would be added to your income. It's not really interest on savings. And in any case even if it was it's not interest for one year. I don't think you need to worry about it as it isn't income as such.

You have to tell them because the system is Self Assessment, but more often that not they already have the information.

The fact that the interest has now been paid with the original payments does not make it capital any more than interest paid in a lump sum on a fixed term bond would become capital because it was all paid together.

Interest is tax when credited to your account / paid regardless of it covering a number of years. For example I often start a regular savings account in April which then matures the following April. The vast majority of the interest relates to the tax year in which the account was opened, but it is paid on the 12 month maturity date and is taxed in that year.

And from what I can remember, I think the company that paid out the PPI refund plus interest had to tell HMRC. Bear in mid this is before the interest on savings £1000 limit came in this year. If I find the paperwork I'll let you know.

I very much doubt it's classed as income, as you have not earned it .Inheritance , prize winnings , gifts etc are not . So check that out.

Be careful on accepting advice ^^ because some of that would be classed as income if it reaches certain thresholds.

www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2105

Given the presence of auto-enrolment trying to get at least some pension provision for most employees, it is very reasonable for you to try to make some pension payments when you are able to.

New Year not for wtc , thats different to self assessment.

OP, My understanding is that it depends on your intentions.

Paying into a pension because you are worried about your lack pension savings and want to use this opportunity to increase them - fine

Paying into a pension to decrease the amount of capital you have for the purpose of assessing means-tested benefits - not OK as this would be seen as a deprivation of capital.

I would recommend contacting CAB to get some advice.

Thank you so much everyone, I know there are some different opinions but every one is helpful. My understanding before this thread was roughly similar to what ChasingSquirrels said. I think it has already been notified by the company and I am pretty sure has to go on my tax return I will 100% double check though.

I really appreciate the link, off to follow it now.

It's really helpful to hear your exact experience with this WashBasketsAreUs

Everyone seems to think it's a good plan to put it into my pension and that was my main dilemma so thank you for such resounding encouragement.