Divorce settlement and tax credits

[Mybloodycat]

So, I have just received my final payment for my divorce, which will be used to buy a house.

However I am receiving tax credits and I am unsure when/if I declare the interest on them?

Obviously interest rates are rising and so are saving rates, but my worry is that as soon as I buy a house that’s all gone, however Tax credits will view the interest as income and drop my payments for next year, leaving me in a situation where I probably won’t have enough income as these were not long term savings that I could use to live on if you get me?

Currently I’m getting about £300 pm in interest which is not being used, it will also go towards a house. I don’t know if I should just leave the rest of it in my usual bank account to prevent getting too much interest or just continue as I am, putting it in easy access savings?

Like I said, it’s not long term, I plan on this being gone as soon as I can buy a house, but I’m also keen not to fall foul of anything either. I can’t tie it up in an ISA as it will all be needed shortly.

TIA

Ignore the haters who don't understand the rules around capital and universal credit.

If you are naturally migrated onto uc, then your savings will be disregarded for 12 months anyway as tc rules would still apply to capital (don't volunteer to move onto it)

It sounds like this is very temporary anyway.

Just to reply to you yes I was on Tax Credits and other legacy benefits at the time, mine didn’t really earn any interest and my other income was zero as I was on unpaid Mat leave at the time so apologies for any confusion, I did think though it was all lumped in with the capital and disregarded/not counted as income.
Mine was disregarded for a bit longer too, as I could prove I was in the process of offering on a house when the initial disregard period ended.
You can temporarily hold premium bonds in your children’s names, but any capital in their names also counts as belonging to you so you can’t give it away to them, or anyone else as that’s deprivation of capital.

There's a 6 month disregard for house sales when buying another home following divorce

So another query after speaking to CAB and tax credits (who did not know their own rules which was fun)

Tax credits say that if I pay a lump sum into my work pension then it would not be discounted because it’s not a private pension.

She advised I get a private pension and then it can be discounted that way, but when I look it seems to imply that any pension is eligible as long as I am paying into it?

I don’t want to start flagging up by opening a new pension that I can’t afford to pay into regularly?

Has anyone got any ideas of the rules CAB said it was too hard for them to answer and the Tax credit helpline tried to tell me I should include the whole divorce settlement! Then told me not to include the interest as it’s discounted, then to include the interest, then to deduct pension, then not to, so now I am really confused!

I am so confused. Everyone says something different.

www.gov.uk/hmrc-internal-manuals/tax-credits-manual/tcm0116060

• the

amount of any contribution made by either customer to a registered pension scheme together with the amount of any tax relief due on those contributions.

www.gov.uk/guidance/tax-credits-working-out-income

It might be that the employer scheme takes the contributions out of gross income (before tax is applied). In this case you do not deduct the pension contributions BECAUSE your gross income is already reduced by them.

Alternatively your pay is taxed, and then the net pension contribution is deducted and the scheme provider reclaims the tax. In this case you do deduct the pension contribution (and related tax element).

The 1st method also has the benefit of saving you, and your employer, the NI contributions.

Either way, as long as it is a registered pension scheme, then pension contributions reduce your relevant income for tax credit purposes.

Have you read the rules? They are pretty straightforward.

Any payment into a uk pension will reduce your income, but it is just done on different parts of the form.

If you pay in via work then when you declare your income from your P60, it has already deducted your pension contributions (also any AVCs - did you look into those yet?)

If you open a private pension and pay into it yourself from your own bank, not via work, then obviously it won't be on your P60. Instead you would declare it on a separate part of the form and you yourself would declare your overall income that year to be the total of your P60 minus the pension contribution to the private pension.
You probably need to phone them again at this point to be clear they understand that your declared income will be lower than that on your P60. They will ask for proof, which you get when you make the contribution.

You only have a few months left in the tax year to get this sorted. Not enough to set it up via lgps (just my opinion) but definitely enough for private pension or AVCs. Up to you if it's worth it overall.

Thankyou @Chasingsquirrels

so on my payslips I get my Gross pay figure (say £1300) then underneath I get tax/NI/pension deductions, then my net pay.

I had always assumed that I would put the pension on my form as it’s claimed out of the gross pension.

I had then also assumed that I could use a bit of spare to buy more pension, but TC say no.

So as you seem to be a bit better at this than me, would I do better just to set up a private pension, anywhere, and put some money into that, or does it look like TC are wrong (it took several of them to get any kind of answer)

www.gov.uk/government/publications/tax-credits-income-working-sheet-tc825

That's the sheet you use to work out what income you tell tax credits you earned

Note, the link above is for when you have made additional payments into a private pension.

It also includes deductions for any charitable donations you might have made. Those reduce your income as well

Are you also aware of the rules about how much you can pay into a pension per tax year? Just in case you planned on whacking huge amounts in!

Payroll can be complicated by there being;

• gross pay (this is the total amount of gross)
• taxable gross (this is the amount which tax is calculated on, if your pensions contributions are taken out of gross pay then the taxable gross is less than the gross)

What is the best option for you depends on the terms of your employer pension scheme, which I think is defined benefit? I don't know how your additional contributions work in terms of return, and I think you need to understand this to make the decision.

Defined contribution is different, you have an invested pot and that's what you get out at the end.

You also need to know how the contributions are being taken in order to reflect then in your tax credits income. You can work this out from your payslip if you cunderstand tax calculations, or ask your employer.
You have 3 months to get this sorted, that is enough time to speak to your employer, find out the information you need, and make a desicion.

Thanks @Chasingsquirrels and @ArcticSkewer

I do have the paperwork for the AVC too, I don’t mind how I do it particularly, I won’t be able to pay in even the 7k extra I am allowed to pay in tbh, I’d say it would be a maximum of 3k this financial year and maybe 3k next financial year.

My confusion is that they were adamant that if I got a 2k lump sum in my pension through work that I could not include it, even though I pointed out it was above what I already pay.

I am quite happy to get a low risk personal pension, I don’t mind how it’s done, but they didn’t seem too sure on their own rules and I was never sure to begin with!

I have a huge problem with numbers and number related things and I stress quite a lot

My confusion is that they were adamant that if I got a 2k lump sum in my pension through work that I could not include it,

Maybe the confusion is as to how the £2k lump sum is getting into your pension, if they think it is going in out of gross pay (reducing your taxable gross) then you wouldn't deduct it - as it would already be deducted.

The terminology might be confusion, but the very clear rules are that pension contributions to a registered provider WILL reduce your relevant income for tax credit purposes, either by decreasing your taxable gross as source, or as a deduction if paid out of net income.

If you pay in via work then when you declare your income from your P60, it has already deducted your pension contributions as stated above isn't completely true - some employer schemes deduct from gross income, some from net. You need to know which yours is.

I am assuming your lgps is similar to other lgps I do know about. It's likely to be a huge pain in the arse to make an additional lump sum payment into it and involve a ton of paperwork and a medical sign off. The benefit you buy with the £3k may be hard to understand as well.

That colours my decision to recommend either the AVC scheme or a separate private pension as both are really easy to set up.

I'm not convinced either are hugely worth doing if you just purely want to keep getting your current level of tax credits, but that's your call.

I'm not convinced either are hugely worth doing if you just purely want to keep getting your current level of tax credits, but that's your call.
I'd actually agree with this, you need to work the figures. It might be that you don't actually lose much in terms of tax credits given both the disregard and the migration to UC after 23/24.
To do this you do need to understand the TC calculations though.

It is also an investment decision, and depends on your personal attitude to risk etc. It was one of the options mooted on the thread, and I've been posting about the technical aspect, but the investment side shouldn't be overlooked.

I would tend to agree with both of you tbh.
This has already taken a considerable amount of several days of reading and I’m still none the wiser.

I guess my main issue is that although it’s not lots of money it is enough with the support staff rise I received to push me over the £2500 threshold, probably by a reasonable amount, and the tax credits maintain a doorway to the warm home bonus etc, which I will need next year when I’ve bought a house and I don’t have this money sat waiting.

I am just worried that this is going to massively impact me next year, I was only just about getting by beforehand and then I got this money, interest rates went up, there’s no houses and I’m kind of stuck with it!!

I couldn’t afford to lose the money, so it would go into the dullest pension ever.

www.lppapensions.co.uk/members/schemes/local-government-scheme/increasing-benefits/apc/

That is what I had been considering rather than AVC as it seemed the quickest and easiest to set up

But, practically I am woefully short on pension. I have a state pension and about 80k in an old work pension (I think) but I was a SAHM for years, and I’m 50 now, so I did think it would be a sensible idea anyway

I have that scheme, op. It was not quick or easy to set up and I had to pay my GP to sign me off. But it's pretty easy to see what you get for the money if you use the calculator - your £3k probably buys you around £250 a year from age 67 onwards.

I'm not convinced it's a great deal but I'm very lacking in investment and pension knowledge.

If you pay in as a lump sum, then (I can't remember) you may also need to apply to hmrc for your 20% tax relief at the end of the tax year.

Btw all my advice is only based on personal experience and personal knowledge, not any background in this apart from that.

• APCs are deducted before your tax is worked out, which means you receive tax relief on your contributions.

I noted the above from your link.
This means that the contributions are taken from gross.

Therefore the taxable gross stated on your P60 will be reduced by the contributions.