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    • My perfect cousin
    • By My perfect cousin 12th Jul 17, 9:33 PM
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    My perfect cousin
    AVC: Can they reduce tax on other income ?
    • #1
    • 12th Jul 17, 9:33 PM
    AVC: Can they reduce tax on other income ? 12th Jul 17 at 9:33 PM
    Does this sound correct?

    The tax benefit from AVCs contributions direct from monthly salary is 40% for the aspect of a salary that is within the upper pay band. The benefit would be 20% for any salary reductions / investments that are within the normal tax band.

    If I take out a (Prudential) AVC direct from my monthly salary it could reduce my annual total taxable salary income (after AVC contributions) down into a lower income tax band (eg from the 40% band down into the 20% band).

    As an example, if I was to make AVC contributions that reduced my annual salary to £40,000, would this create a 'space' of £5000 worth of 20% tax for other income that I may have in the tax year - such as rental income or interest from savings?

    This is largely academic as I doubt that I would have such extra income, but I would be interested to know whether this is correct or not? many thanks
Page 1
    • Dazed and confused
    • By Dazed and confused 12th Jul 17, 9:43 PM
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    Dazed and confused
    • #2
    • 12th Jul 17, 9:43 PM
    • #2
    • 12th Jul 17, 9:43 PM
    If you mean for example,

    Salary £45000
    AVC £4500
    Taxable pay £40500

    Then yes, it would be the same as how a lot of defined benefit, contribution or CARE schemes work (unless you live in Scotland).

    You could still have the £500 or £1000 savings allowance and dividend allowance tax bands as well (income taxed at 0%) and making such contributions could in theory make the difference between getting £500 or £1000 interest taxed at 0%.
  • jamesd
    • #3
    • 12th Jul 17, 11:25 PM
    • #3
    • 12th Jul 17, 11:25 PM
    Yes. It's even better for salary sacrifice schemes because you end up saving basic rate range NI calculated for each pay period and higher rate income tax calculated over the whole year.
    • My perfect cousin
    • By My perfect cousin 13th Jul 17, 2:24 PM
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    My perfect cousin
    • #4
    • 13th Jul 17, 2:24 PM
    • #4
    • 13th Jul 17, 2:24 PM
    thanks. Just so that I understand...

    using the helpful example from D&C

    salary of £45000
    AVC of £4500
    taxable pay = £40500

    savings interest of £4000
    total taxable pay = £44500

    = basic rate taxpayer therefore reduces taxable savings income by £1000

    = taxable income of £43500 and nothing in higher tax bracket

    is this correct?
    • Dazed and confused
    • By Dazed and confused 13th Jul 17, 10:08 PM
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    Dazed and confused
    • #5
    • 13th Jul 17, 10:08 PM
    • #5
    • 13th Jul 17, 10:08 PM
    No.

    Nothing will reduce the amount of savings income which has to be taxed.

    If the figures are for this year, 2017:18, then you have £44500 taxable income which is taxed as,

    £11,500 - no tax due to personal allowance
    £29,000 x 20% (basic rate on wages)
    £1,000 x 0% (personal savings allowance rate)
    £3,000 x 20% (basic rate on savings)

    If you live in Scotland ignore all of the above.
    Last edited by Dazed and confused; 13-07-2017 at 10:11 PM.
    • My perfect cousin
    • By My perfect cousin 14th Jul 17, 6:19 AM
    • 25 Posts
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    My perfect cousin
    • #6
    • 14th Jul 17, 6:19 AM
    • #6
    • 14th Jul 17, 6:19 AM
    No.

    Nothing will reduce the amount of savings income which has to be taxed.

    If the figures are for this year, 2017:18, then you have £44500 taxable income which is taxed as,

    £11,500 - no tax due to personal allowance
    £29,000 x 20% (basic rate on wages)
    £1,000 x 0% (personal savings allowance rate)
    £3,000 x 20% (basic rate on savings)

    If you live in Scotland ignore all of the above.
    Originally posted by Dazed and confused
    thanks again - that was what I was trying to say. The AVC would enable the savings interest to be at basic rate and thereby resulting in £1000 being untaxed.
    • Dazed and confused
    • By Dazed and confused 14th Jul 17, 8:11 AM
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    Dazed and confused
    • #7
    • 14th Jul 17, 8:11 AM
    • #7
    • 14th Jul 17, 8:11 AM
    and thereby resulting in £1000 being untaxed

    No, it is still taxed, just at a rate of 0%. In your scenario it makes no difference but to some it will make a big difference elsewhere when calculating their tax bill. For example older married pensioners could lose £500 of their allowances by having that £1000 income, still taxed at 0% but it will cost them in another part of the calculation
  • jamesd
    • #8
    • 14th Jul 17, 11:07 AM
    • #8
    • 14th Jul 17, 11:07 AM
    What the AVCs do is increase your basic rate band by the gross AVC amount. That leads to you paying basic rate on more of your income and never getting to the point where you have reduced personal savings allowance.
    • Dazed and confused
    • By Dazed and confused 14th Jul 17, 11:23 AM
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    Dazed and confused
    • #9
    • 14th Jul 17, 11:23 AM
    • #9
    • 14th Jul 17, 11:23 AM
    Not in this case. From the op's original post (and subsequent replies) I think he is making contributions before tax which I know Prudential definitely do (at least for Teachers if not everyone) so it has similar effect overall but is maybe simpler to follow providing you understand it's taxable pay not salary which is important and you would just the standard basic rate band.
  • jamesd
    Yes, if it's coming out of gross pay there's no need to increase the basic rate band since the lower pay takes care of everything.
    • My perfect cousin
    • By My perfect cousin 14th Jul 17, 10:07 PM
    • 25 Posts
    • 1 Thanks
    My perfect cousin
    thanks again.

    The AVCs come from my monthly (Local Government) salary by Prudential. As such the monthly salary reduces at source.

    As I had hoped, it seems that if my net pay (after AVCs) plus interest is £45000 or less, I will be taxed at the basic rate. It also seems that the 0% tax band for my savings interest will therefore apply to the first £1000 or interest (as I will be a basic rate tax payer).

    From your excellent advice / comments etc, it seems that the key to the above (especially the benefit of 0% tax of first £1000 interest) is to plan my total AVCs so that my total net income does not exceed £45000.

    For others who may be interested in this thread - I am aware of (at least some) of the other AVC considerations. As I understand it, the maximum annual pension contribution limits and lifetime limits are also important when planning total AVC pension. I haven't mentioned this previously as it isn't my query just now.
    • My perfect cousin
    • By My perfect cousin 21st Jul 17, 6:12 PM
    • 25 Posts
    • 1 Thanks
    My perfect cousin
    Hi. I'd really value confirmation of the excellent advice received so far. The reason being that Prudential (the source of the AVCs) are refusing to respond to my questions on the matter. They say that this would be advice rather than facts. I don't agree.

    The question is

    ' If my AVC payments from salary at source reduce my taxable income from salary to a point that is below the higher tax rate threshold, would the 'gap' between the taxable pay post-AVCs and the higher tax threshold be available for savings interest. yes or no?'

    I think yes - folks on here think yes... can it be anything other than 'yes'?

    The problem is that, without any response from Prudential I can't plan my tax matters and am likely to reduce my AVC contributions as a result.

    The response from Prudential (get financial advice / an accountant) has been disappointing.
    • xylophone
    • By xylophone 21st Jul 17, 7:11 PM
    • 23,144 Posts
    • 13,412 Thanks
    xylophone
    https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

    The amount of your Personal Savings Allowance depends on your adjusted net income

    https://www.gov.uk/guidance/adjusted-net-income



    https://www.pru.co.uk/rz/localgov/avcs/

    Your contributions are taken from your pay before tax.


    http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0491

    https://www.moneymarketing.co.uk/tapering-of-annual-allowance-adjusted-and-threshold-incomes/

    Re PSA and "adjusted net income"

    http://www.litrg.org.uk/sites/default/files/files/Savings%20and%20dividend%20tax%20FINAL.pdf
    Last edited by xylophone; 21-07-2017 at 7:28 PM. Reason: add
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