Pensions

[FourDecades]

Have googled but not really found the exact answer so I'm hoping MN can help!

I work for the NHS and pay into the pension. This is taken directly off my wages at source.

When l divorced my XH l was awarded a pension sharing order but the NHS pension doesn't accept top up payments and so l opened a private pension with Royal London.

Due to low income l get some Child tax credits and working tax credits.

I have managed to save some money and l'm thinking it would be sensible to put some into my private pension.

If l do this, am l correct that l take the amount l pay into my private pension off my Income - which will therefore decrease my annual income for that tax year?

I just want to check that, that is what l do even though l already have my NHS pension contributions taken off.

You can pay into your private pension from your savings. Your income, as in what is written on your pay slip, will stay exactly the same.

A few weeks after you’ve put the money into your private pension, an extra 25% will automatically be added. It’s called tax relief and it’s a bonus from HMRC which the pension company sorts out on your behalf. Because of that bonus there’s a limit to how much you can save into your pensions, and the limit is 100% of your income each year (or 40k if you earn over £40k).

Be careful about going close to the limit though, because it includes the amount going into your NHS pension too. The calculation to work out how much money goes into your NHS pension is really complicated - don’t forget the employer pays in extra which you never see on your payslip.

You don’t need to know what the NHS pays in as employer, to check whether you’re close to the Lifetime Allowance. It’s based on a multiple (20x) of your annual benefit, because NHS is a Defined Benefit scheme.

I can’t see that OP is will be anywhere near that £1m allowance if her earnings now entitle her to in work benefits. Good call on checking though, if the Pension Sharing Order was sizeable.

Re the top up for tax relief made by private pension companies - claiming on your behalf - Aviva and Standard Life add it instantly, I’m sure others do too. So don’t be confused if that happens!

Many thanks 😊

Any additional pension contributions would reduce your relevant income for tax credits purposes.

Bear in mind the £2,500 difference, so if your income this year is less than £2,500 different to your income last year - then your tax credits for this year is based on last year's income. In only gets adjusted if it is more than £2,500 different.

I hope you don't mind me jumping on this thread OP. I am in the same position.

If I start a private pension but want to add to it from salary rather than savings - does the tax benefit get added automatically in the same way or will I not pay tax on it in the first place?
Hope that makes sense

@dahliaaa when you say from salary, do you mean straight forward employed by a company PAYE salary with your employer deducting your tax at source, before paying?

In that case, if you are a basic rate tax rate tax payer, the tax will have been paid at 20% on your behalf by your employer.

If you then pay your amount into a private pension, then pension company will reclaim the tax paid from HMRC on your behalf and add it to your private pension. Most will just do that instantly - e.g. you pay in £100 one day, and as soon as they reflect it in your balance you see £125.

Don’t be confused that £125 is 25% more than £100, not 20%. If you had £125 pre-tax, the tax (20%) on £125 would be £25. So they make your £100 up to £125. (Yay!)

Now, your pension company do not know if you are a higher rate tax payer - they do not know your personal tax position. So if that applies you do need to sort out the additional tax relief yourself. There are 2 ways:

• self assessment, detail how much you paid into the private pension, and you’ll get a refund of the tax you’ve overpaid. Useful if you don’t know how much you can put in over the year

• adjustment to your tax code. Useful if you know what you expect to put in - I put in a regular amount each monthly. In this case, one call to HMRC helpline, and they’ll adjust your tax code so that you can earn more before you start paying tax - this tax saving is equal to the amount of tax relief on your contributions

@cocomarine thank you so so much for that reply. I've been tying myself up in knots trying to work it all out and that explains it brilliantly. Thank you !

No problem! I love a bit of pensions chat

Going back to OP’s original question on whether the contribution to her private pension will reduce her income (for tax credit purposes I assume), yes it does. And also you take off the gross amount. So for example if you have added £1000 to your private pension over the year, you deduct the gross amount of £1250 from your income (the extra £250 being the tax relief).

Having said that, I never find there is anywhere online to explain this when renewing tax credits. You can put in your reduced income but they ignore it because they use the figures supplied by your employer/HMRC (which won’t reflect payments to a personal pension if not through the your employer). I have previously written to them following renewal, explaining I have made personal pension contributions, and enclosed a printout from the pension company showing the contribution(s), and this has been accepted.

I have to have a call every year to explain the discrepancy between my p60 figures and the figures I've entered, and a couple of times have had to provide evidence of the contributions.
You can also deduct (gross) gift aid payments.