To claim tax credits by upping my pension contribution?

[TaxCredits]

I’ve just found out that if I up my pension contribution via salary sacrifice, we would get a substantial amount of tax credits and hardly be worse off.

I’m the sole earner on 40k - 4 kids, one with a disability.

If I put 1/2 my salary into the pension, I get income tax relief, NI saved and my employer pays the full employer NI saving.

This means that I end up with around 23k in my pension per year.

In addition we would get tax credits of around £1150, which would otherwise be tapered away at 41p per pound I earn (plus tax and NI on top)

Basically doing the sums we would be around £300 per month worse off now, for 2k in my pension! Or put another way, for every 27p I give up of income I give up now, £1.13 would go into my pension.

I would be stupid NOT to do this, right? We have to save for our future and it’s totally within the rules.

Sorry - redid the maths - we would be £460 p/m worse off in the now - but still seems worth it, especially as that money in the pension can be passed on IHT free if something happens and we can withdraw it using drawdown later on as and when we need it mostly below the tax allowance.

Anyone else spotted this?

If you can love with the drop then do it.! You’d be daft not to as we need provisions for old age. Retirement actually scares me as i’m Worried how i’ll Survive. At least i’ll Own my home.

Thanks! Yes we can just about live with the drop, it means saving less just now in ISA's, being very careful with money etc but there's no way I can match that sort of initial return with those anyway. Extraordinary really.

And yes on the provisions in old age. As far as I can see it, with salaries as they are and housing so costly - most people are either going to be reliant on the state now, or later in life as of people I know, none seem to have taken pensions very seriously apart from one (who told me about this!).

Would have been nice to live in a time when you could actually have a house, kids and a pension without any of this worry - now it seems you can only pick 2 of them max really.

I’d do it and wouldn’t even think twice about it either.

I'm thinking of doing something similar with my sharesave scheme to help me save enough to buy a house, go for it

My tax credit calculation is net of pension. I haven't thought of putting extra in, but always noticed the difference. It's a pain for remortgaging though as the banks take the lower figure as your income, and lend less as a result, so it could come to bite you.

Been doing this myself for a few years. Ditch the ISA saving for now. Also depends on how near the 55 age you are to withdraw the money of you need it. It's there to encourage people to save for their retirement. Go for it.

Go for it x

Do it... I think you can also claim some more tax relief via self assessement, think it’s an extra £100 per month the following year

This can cause some lenders to avoid you for remortgages but others ignore the pension contributions as they are 'voluntary' and can be stopped at any time.

Wouldnt you only get tax credits for two children though? Alrhough you will get a Disabillity element .

Will this be your first claim for child tax credits? If it is bear in mind that they take your previous years salary to calculate your award for this year.

Thanks all!

We get a smaller amount of TC just now - so not first claim thankfully. Was putting 3% of salary into pension (minimum necessary to get employers contribution). But when I heard that if I upped the contribution I'd not be that much worse off I really took a proper look!

We would get TC for all kids as all are old enough to be on system.

Just thinking it's worth 'locking in' a low salary now before the system changes in feb (we will become a universal credit area and after that we would indeed only get it for 2 kids with a new claim).

Thanks again all - I was questioning the ethics but it seems sensible. Mortgage shouldn't be an issue too.

Just be aware that if you are making significant changes to your claim (ie that it needs to be recalculated) you may be moved onto universal credit instead.

You might want to have a look at the section on "Notional Earned Income"

Forgot link sorry revenuebenefits.org.uk/universal-credit/guidance/entitlement-to-uc/what-is-income-for-uc/

You can still do new claims for more than two dc if born after April 2017 anyway.

I think notional earned income would not be applicable for approved pension schemes for paye earners. For self employed people looking to find a more exotic strategy (I dunno....buying a Mercedes as a company vehicle) it might apply

The regulations also include provision for ‘notional earned income’ – this is where a claimant has deprived themselves of earned income, or whose employer has arranged for them to be deprived, for the purposes of securing entitlement to UC or an increased amount of UC. Where this is the case, the person will be treated as having the earned income.

If I were you I'd double check - the government tend to be nasty bastards and work for their benefit not yours.

How old is your oldest child?

But also from there

UC is generally based on net income and therefore from the claimant’s employed earnings can be deducted:

Any relievable pension contributions made to a registered scheme
Income tax or national insurance contributions paid in the assessment period in respect of those employed earnings
Any sums withheld under a payroll giving scheme under Part 12, ITEPA 2003.

That has to be interpreted as Pensions are exempt, and have a hard limit of 40k per a anyway. Provided I don't go under minimum wage or put over 40k in the pension there is no issue. I'm not looking to get an entitlement to UC anyway, I'm looking to ensure I don't have an uncomfortable retirement.

The system is almost certainly built for this - it's up to the individual to decide whether they want jam today or tomorrow (I will still be receiving an overall drop in income today).

Plus a pension contribution could never count as deprivation of income in a court judgement surely - it's just deferred income for my future self.

How did you work this out? Is there a calculator or some clear info somewhere where one can play around with figures?

I'd love to see the answers if a non working mother was asking how to divert income to claim more benefits. Makes you think ...

www.gov.uk/tax-credits-calculator

Basically if you have a salary sacrifice pension scheme, just adjust the income (ignore the bit that asks about pension contributions) as it would appear on your P60. I put in 20k.