96% tax relief on pensions


A

Andy Pandy

It looks like Gordon has pulled off a masterstroke - addressed one of the major
flaws in the tax credits system and at the same time given people a big
incentive to increase pension savings!

The tax credits "income increase disregard" has increased massively from £2,500
to £25,000, which will eliminate most of the problems caused by tax credits
always initially being assessed on last year's income

Together with the pension changes coming in April, where limits on tax relief
for contributions to pension funds will go up to 100% of earnings, this could
provide a nice little boost to get many people saving for their pensions.

Someone with 2 kids earning £25,000 or less, or 3+ kids and earning £30,000 or
less, can now easily get 96% tax relief on pension contributions - simply by
contributing in alternate years.

Say they contribute £10,000 to a pension fund/AVC/SIPP etc. They will get 22%
tax relief on this, and their tax credits will increase by 37% of the £10,000.

If they then contribute *nothing* the next year, they will get the 37% increase
in tax credits on the *same* £10,000 again next year, unless their gross income
has increased by more than £15,000.

So a £10,000 payment into their pension has only cost them £400! Only problem is
they will be temporarily out of pocket in the first year till they get the rest
of the "relief" back in the second year, but if they've got £4000 knocking
around in a savings account it could be a very good investment.

In some rarer situations, some people may even be able to get over 100% tax
relief on pension contributions, so you can put money into a pension scheme but
your take home pay could actually *increase* as a result! Eg if your employer
operates a "salary sacrifice" scheme for pension contributions so you save NI as
well, or if you've got several kids and/or childcare costs which could mean you
are a higher rate taxpayer yet still entitled to more than just the family
element of the CTC.

Can anyone spot a flaw in this?
 
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L

Leigh Albon

Andy Pandy said:
It looks like Gordon has pulled off a masterstroke - addressed one of the
major
flaws in the tax credits system and at the same time given people a big
incentive to increase pension savings!

The tax credits "income increase disregard" has increased massively from
£2,500
to £25,000, which will eliminate most of the problems caused by tax
credits
always initially being assessed on last year's income

Together with the pension changes coming in April, where limits on tax
relief
for contributions to pension funds will go up to 100% of earnings, this
could
provide a nice little boost to get many people saving for their pensions.

Someone with 2 kids earning £25,000 or less, or 3+ kids and earning
£30,000 or
less, can now easily get 96% tax relief on pension contributions - simply
by
contributing in alternate years.

Say they contribute £10,000 to a pension fund/AVC/SIPP etc. They will get
22%
tax relief on this, and their tax credits will increase by 37% of the
£10,000.

If they then contribute *nothing* the next year, they will get the 37%
increase
in tax credits on the *same* £10,000 again next year, unless their gross
income
has increased by more than £15,000.

So a £10,000 payment into their pension has only cost them £400! Only
problem is
they will be temporarily out of pocket in the first year till they get the
rest
of the "relief" back in the second year, but if they've got £4000 knocking
around in a savings account it could be a very good investment.

In some rarer situations, some people may even be able to get over 100%
tax
relief on pension contributions, so you can put money into a pension
scheme but
your take home pay could actually *increase* as a result! Eg if your
employer
operates a "salary sacrifice" scheme for pension contributions so you save
NI as
well, or if you've got several kids and/or childcare costs which could
mean you
are a higher rate taxpayer yet still entitled to more than just the family
element of the CTC.

Can anyone spot a flaw in this?
Seems to work for those with kids that can get tax credits, what about those
of us on low income with no kids who dont qualify for WTC or any kind of
help.

Leigh
 
M

Martin Davies

Leigh said:
Seems to work for those with kids that can get tax credits, what
about those of us on low income with no kids who dont qualify for WTC
or any kind of help.

Leigh
WTC is payable for those on low income. Though I understand the hours
requirements are a little different.

Martin <><
 
L

Leigh Albon

Martin Davies said:
WTC is payable for those on low income. Though I understand the hours
requirements are a little different.

Martin <><
I and others i know are just other the limit, we know this bbecause we
applied, so we have to live week to week with no spare cash to invest in a
pension.

Leigh
 
M

Martin Davies

Leigh said:
I and others i know are just other the limit, we know this bbecause we
applied, so we have to live week to week with no spare cash to invest
in a pension.

Leigh
In any definition of low income, or level of credit, there will always be
some over the limit. Even while still on what can be considered low income.
If its any consolation, those below the upper limit often also have no spare
cash to invest in a pension.

Still, I daresay we could all do with an extra £400 a month to stick in a
pension for the next 35 years to get a decent pension at the end.

Martin <><
 
A

Andy Pandy

Leigh Albon said:
Seems to work for those with kids that can get tax credits, what about those
of us on low income with no kids who dont qualify for WTC or any kind of
help.
You get a personal allowance per person that your salary supports (usually,
unless you have a partner who is out of work).

If we had a decent tax system like most civilised countries we wouldn't need
these daft tax credits.
 
A

Andy Pandy

Leigh Albon said:
I and others i know are just other the limit, we know this bbecause we
applied, so we have to live week to week with no spare cash to invest in a
pension.
On the contrary...

If you qualify for the WTC in terms of hours, age etc, but are just above the
limit income wise, then the above method of pension contributions should work
for you too.

By making the pension contribution you push your assessed income below the limit
and can achieve the same tax relief on the difference between your new lower
income and the limit (you'll only get 22% tax relief on the difference between
your original income and the limit - but that won't be much if you're "just"
over the limit).

The lower your income the less you could contribute and get the 96% relief - if
your income goes below approx £7000 then you'll only get 84% as you're out of
the basic rate band. Don't take it below £5220 as that's the maximum tax credits
threshold.

You can work out your own personal limit by adding up the elements of WTC/CTC
you are entitled to (don't include the family element of the CTC), dividing by
0.37 and adding £5220. The elements for next year are here:

http://www.hm-treasury.gov.uk/pre_budget_report/prebud_pbr05/press_notices/prebu
d_pbr05_press02.cfm

Although don't be surprised if the govt introduce more changes to the tax
credits system again in the main budget in March, which could stop this sort of
thing....
 
R

Robbie

Martin said:
WTC is payable for those on low income. Though I understand the hours
requirements are a little different.

Martin <><
It's not available for under-25s with no children or disabilities. For
25+ I think it's 30 hours.

The old Earnings-Top up scheme, which was a trial that ran for childless
singles and couples in the late 90s, and which was the forerunner to
this part of the WTC was far more generous - the lower age limit was 18
and with a 16 hour qualification.

Robbie
 
M

Martin Davies

Andy said:
You get a personal allowance per person that your salary supports
(usually, unless you have a partner who is out of work).

If we had a decent tax system like most civilised countries we
wouldn't need these daft tax credits.
What is a decent tax system?
We have effectively a 4 tier tax system for income tax (no tax, 10%, 22%
and 40%). Though a lot of those receiving tax credits don't pay anything
like as much income tax out.
Certainly tax credits could be improved. Not so sure about other taxation
methods (apart from road tax and fuel tax that could be amalgamated).

Martin <><
 
F

Fred

Martin Davies said:
What is a decent tax system?
We have effectively a 4 tier tax system for income tax (no tax, 10%, 22%
and 40%). Though a lot of those receiving tax credits don't pay anything
like as much income tax out.
Certainly tax credits could be improved. Not so sure about other taxation
methods (apart from road tax and fuel tax that could be amalgamated).

Martin <><
I thought the incremental tax system went like:

22%, IT = 10%, NI = 11%
33%, IT = 22%, NI = 11%
70%, IT = 22%, NI = 11%, WTC reduction of 37%
33%, IT = 22%, NI = 11%
41%, IT = 40%, NI = 1%

or something more like that.
 
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R

Ronald Raygun

Fred said:
I thought the incremental tax system went like:

22%, IT = 10%, NI = 11%
10+11 is 21, not 22. And for many people NI is only 8%, but otherwise OK.
33%, IT = 22%, NI = 11%
OK.

70%, IT = 22%, NI = 11%, WTC reduction of 37%
Not OK. You can't count TC withdrawal unless you also count TC itself
earlier on in the sequence.
33%, IT = 22%, NI = 11%
Didn't someone say the TC reduction band extends into the HRTP bracket,
making for a 78% rate?
41%, IT = 40%, NI = 1%
The NI drop doesn't kick in at the exact same moment as the IT boost,
so depending on circumstances' details, there is a narrow band of
either 22%+1% or 40%+11%.
 
A

Andy Pandy

Fred said:
I thought the incremental tax system went like:

22%, IT = 10%, NI = 11%
33%, IT = 22%, NI = 11%
70%, IT = 22%, NI = 11%, WTC reduction of 37%
33%, IT = 22%, NI = 11%
41%, IT = 40%, NI = 1%
Nope. It's far more regressive than that, especially for families. It goes
something like this for a typical family (ranges are approximate and depend on
circumstances):

10-4600: 100% - JSA withdrawal
4600-7000: 85% to 88% - HB/CTB withdrawal, (+ some of IT, NI, TC withdrawal)
7000-12000: 95.5% - IT(basic rate), NI, TC withdrawal, HB/CTB withdrawal
12000-20000: 89.5% - IT(basic rate), NI, TC withdrawal, HB withdrawal
20000-25500: 70% - IT, NI, TC withdrawal
25500-32800: 33% - IT, NI
32800-37300: 23% - IT, NI(above LEL)
37300+ : 41% - IT(higher rate), NI(above LEL)

There will be a couple of very narrow negative bands as WTC and the 30 hour
element of WTC kick in.

So in general, tax rates drop as income increases.
 
A

Andy Pandy

Ronald Raygun said:
Not OK. You can't count TC withdrawal unless you also count TC itself
earlier on in the sequence.
CTC starts at 0. WTC starts at 16 hours and increases at 30 hours - so you end
up with a couple of very narrow very negative bands.
Didn't someone say the TC reduction band extends into the HRTP bracket,
making for a 78% rate?
Not usually. It can do for big families or families with disabilites or
childcare costs.

If it were usual I'd have entitled the post "114% tax relief on pensions"
 
F

Fred

Andy Pandy said:
Nope. It's far more regressive than that, especially for families. It goes
something like this for a typical family (ranges are approximate and
depend on
circumstances):

10-4600: 100% - JSA withdrawal
4600-7000: 85% to 88% - HB/CTB withdrawal, (+ some of IT, NI, TC
withdrawal)
7000-12000: 95.5% - IT(basic rate), NI, TC withdrawal, HB/CTB withdrawal
12000-20000: 89.5% - IT(basic rate), NI, TC withdrawal, HB withdrawal
20000-25500: 70% - IT, NI, TC withdrawal
25500-32800: 33% - IT, NI
32800-37300: 23% - IT, NI(above LEL)
37300+ : 41% - IT(higher rate), NI(above LEL)

There will be a couple of very narrow negative bands as WTC and the 30
hour
element of WTC kick in.

So in general, tax rates drop as income increases.
Thanks for that.

A lot of people don't like to see withdrawal of a benefit as a tax.

However if you're looking at incentivising people to work the effective
incremental tax equivalent situation is a far better marker and illustrates
what used to be called the poverty trap.

What astounds me more than anything else is the number of agencies and civil
servants who deal with all this very inter-related finances. It would be so
much easier for a single agency to do a single calculation in the same way
PAYE is calculated. It can't be beyond the wit of man!
 
C

Clive Martin

In message <3vlgqoF16je9qU1@individual.net>, Andy Pandy

Can anyone spot a flaw in this?
Employee earned income for tax credit purposes is gross not net. So in
your example the earnings used in the calculation would be those before
the pension contribution, not after.
[SI 2002 No. 2006 The Tax Credits (Definition and Calculation of Income)
Regulations reg 4 etc]

Clive
 
A

Andy Pandy

Clive Martin said:
Can anyone spot a flaw in this?
Employee earned income for tax credit purposes is gross not net. So in
your example the earnings used in the calculation would be those before
the pension contribution, not after.
[SI 2002 No. 2006 The Tax Credits (Definition and Calculation of Income)
Regulations reg 4 etc]
Yes, but it also says that contributions to pension schemes are deducted from
the claimant's total income.

Or are you saying the "income increase disregard" (of 2,500 this year, 25,000
next year) only applies to employment income?

The tax credits guide suggest consulting your P60 to determine your income last
year - the income quoted on P60's is *net* of any company pension scheme
contribution *and* AVC's.
 
C

Clive Martin

Andy Pandy said:
Clive Martin said:
Can anyone spot a flaw in this?
Employee earned income for tax credit purposes is gross not net. So in
your example the earnings used in the calculation would be those before
the pension contribution, not after.
[SI 2002 No. 2006 The Tax Credits (Definition and Calculation of Income)
Regulations reg 4 etc]
Yes, but it also says that contributions to pension schemes are deducted from
the claimant's total income.
Yes - you are quite right. In a typically convoluted fashion the
exception for pension contributions is defined prior to the definition
of employee income (at reg 3(7)) and I overlooked this.

There is a fairly standard "voluntary deprivation" provision (at reg 15)
but I doubt HMRC could rely on that to stop the sort of clever manoeuvre
you suggest.

Clive
 
A

Andy Pandy

Fred said:
Thanks for that.

A lot of people don't like to see withdrawal of a benefit as a tax.
Especially the govt, 100% tax on the poor? But taking money off people by
reducing benefits has exactly the same effect as taking money off people by
taxing them.
However if you're looking at incentivising people to work the effective
incremental tax equivalent situation is a far better marker and illustrates
what used to be called the poverty trap.
Still is, and has been made much bigger in recent years.
What astounds me more than anything else is the number of agencies and civil
servants who deal with all this very inter-related finances. It would be so
much easier for a single agency to do a single calculation in the same way
PAYE is calculated. It can't be beyond the wit of man!
It would be easy technically but impossible politically. Logically it makes no
difference whether you reduce someone's benefits as their income increases or
simply just tax them on their income. But then it would become apparant to
everyone what a regressive system we've got.
 
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M

Martin Davies

Andy said:
Especially the govt, 100% tax on the poor? But taking money off
people by reducing benefits has exactly the same effect as taking
money off people by taxing them.
Some benefits are not the same as wages, just top-ups.
Other benefits can be paid in addition to wages, sometimes only for a
period, other times indefinately.

Still is, and has been made much bigger in recent years.
Doesn't seem to be an attractive workable solution around though.
Minimum wage has been tried, though has its own drawbacks.

It would be easy technically but impossible politically. Logically it
makes no difference whether you reduce someone's benefits as their
income increases or simply just tax them on their income.
Though taxation tends to be less than a simple benefit reduction.
Earn £100 a week gross, taxation overall is pretty low. Earn more and
taxation increases, though not increasing by the same amounts as the
earnings increase.
Earn £200 gross, tax increase isn't massive. Even a jump to £300 gross isn't
a large jump in taxes.

But then it
would become apparant to everyone what a regressive system we've got.
Taxation is both a means of revenue for the government and a control on the
economy.
Its not too bad, allows people a decent standard of living and allows them
to earn more while not increasing the tax burden too much.

Martin <><
 
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