A pay rise would make me financially worse off, why?

[Amy0408]

Hi just wondering if anybody else has had this issue.

I'm currently earning £17,000 before tax and NI, and I'm in reciept of benefits as I'm a single parent and my child is in full time childcare. I've recently interviewed for a job which would bump my salary to £22,000. I've been onto a few. GOV benefit calculators and it shows that I would be around £3,000 better off staying at £17,000 than taking the new job with a higher salary.

Does anybody know why this is? I know that taking a higher salary would lower my benefit entitlement but surely it shouldn't leave me worse of than I am now. I feel as though the system doesn't allow people to take that next step up the career ladder.

Do you pay into a work pension ? Put money into the pension

We found this recently when dp got a promotion. We went from an income of just under £15000 to just under £20000.
His take home pay has gone up by around £300 a month, we lost £400 a month tax credits and £100 a month housing benefit, so £200 a month less money plus no free prescriptions, dentists or 2 year funding

Its absolutely ridiculous that we are worse off than we were on minimum wage.

I think that if the earnings before tax are >£17k, then in work top up bens like tax credits etc are cut.
It happened to my step sister. She's an sahm with 3 small kids. When partner earned £17k they got generous top ups.
He did overtime to try and improve the outlook, but their in work bens were cut by 500pcm.

@Hyggebernati0n. Excellent idea

Is the new job worth it? If you’d be happier in that job then go for it

Excellent idea re; upping pension contributions -win, win.

Re the pension contribution suggestion - it's very underused by people and I don't understand why.

So the OP could take the job for £22k. Put £5k into her pension, which brings her salary down to £17k and which she'd get the same amount of benefits on. On top of which, her pension contribution would be topped up by 1) her employer and 2) the government 20% additional amount. And on top of that even, the pension makes money because it's in an investment account. Of course, you can't have it till you're 55, but still.

Sorry to derail but @NotSuchASmugMarriedNow1 the government adds 20%? I’ve never heard of this?

This is the basic rate tax relief that is provided through UK registered pension schemes. So if £80 left your bank account, your actual contribution would be £100 £80 x 0.8.

So in effect, for every 80 you save, you get a 20 boost.

I thought they looked at your pre tax income before pension, tax and Ni comes out.
Tc always ask us for gross.

You receive tax relief on private pensions. Look at www.moneyadviceservice.org.uk or www.moneysavingexpert.com Another example is that I pay X amount into my private pension and my employer pays in the same amount. Why turn down free money ? That's why when you start a new job, you are offered auto enrollment into a company pension. It's your decision if you opt out.

So if she took the job at the higher wage would the £5k be put straight in pension pot so her wages would be '£17k' on paper and for tax credits? Have I Understood that right? It's interesting as there is no incentive to get better paid jobs to be not be gaining financially.

This is the problem when in work benefits are so overly generous in the first place, it gives people no incentive to increase their hours or earnings.

I get that there's tax relief on pension payments, but surely pensions payments aren't disregarded as income for benefit reasons?

You are right jemi. I speak as a person who claims in work benefits. Universal credit isn't the answer though.

For housing benefit (can’t say about UC) half of pensions contributions are disregarded. For those whose HB has gone down as well as tax credits when wages have increased- you may want to check that the decreased tax credits are bejng used to calc the HB.

I thought they looked at your pre tax income before pension, tax and Ni comes out.
Tc always ask us for gross

This.

I am considering opting out of work pension and paying into private. As far as i can tell work pension contributions aren’t considered for tax credits, all they ask for is the figure from my P60.

However they do appear to take into account anything i pay into a private pension. So if I pay in 5k it reduces my “imcome” by the same amount.

Benefits don’t include employer pension contributions but do include personal contributions

That’s what I thought

Ok this is from the gods website

Tax Credits: Pension contributions

If you pay into an occupational or personal pension you should enter the gross amount you pay in, including the value of tax relief.

Do not include pension contributions made by employers. All employer pension contributions are ignored completely in tax credits and should not be included in the amount entered for gross earnings or anywhere else in the calculator.

It is VERY clear. Personal contributions ARE included in benefit calculations so the op just putting the extra money in her pension pot won’t help

maybe i’m thick but it isn’t very clear to me

So when the tc form asks for pension contributions, i should include the amount i have paid into my personal pension, plus any amount i have paid into my occupational pension?

Just not employer contributions, which o don’t think i know what they are anyway. I just get £x deducted from my payslip...

My pension contributions are taken off the amount used to calculate tax credits. If you look on the HMRC website (once you have the job) it’ll give the taxable income for the year and that’s what you should use for tax credits. Mine is c. £4000 lower than my gross salary because I pay £300+ a month pension.

When you pay into a work place pension, it comes directly out of your pay, so its already taken account of in the figure you to give tax credits.

When you pay into a private pension, you can deduct the amount you pay into your private pension plus the 20% tax relief off the figure you declare as income to Tax Credits. Thats so the people who pay private don't end up worse off than people with company pensions.

However expect HMRC to question it and ask for proof if you do this, even if its in their own rules to do so. It delays our payments by renewal by months every year.

I don't know if it works that way for other benefits eg housing, I would think not. You would need to do one of the online benefit checkers like entitled to and find out.

Personal contributions ARE included in benefit calculations so the op just putting the extra money in her pension pot won’t help

You're wrong! The reason that they ask for the amount you put in a personal pension is so that they can take it off your gross income. The instructions say to ignore contributions to an employer's scheme because these are already accounted for in your P60.

Whoever said that private pension contributions cannot be deducted - a private pension scheme is a personal pension by another name - it just means one that isn't an employer's scheme.

Also if you pay into a workplace pension it's worth double checking whether your contributions have definitely been accounted for in your P60. DH's workplace pension is a group personal pension, so the contributions are not accounted for in his P60.

What a truly fucked up system when someone can afford to pay £300 a month into their pension yet be considered hard up enough to then qualify for tax credits.