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  • FIRST POST
    • fiisch
    • By fiisch 4th Sep 17, 10:14 PM
    • 160Posts
    • 61Thanks
    fiisch
    Guidance on Pension / Child Benefit
    • #1
    • 4th Sep 17, 10:14 PM
    Guidance on Pension / Child Benefit 4th Sep 17 at 10:14 PM
    I am a bit confused as to what is best to do in order to maximise our monthly income and avoid paying more tax than necessary(!) and indeed repaying child benefit.

    About Me:
    I'm 30, annual salary of £59k. My employer pays a non-contributory 10% amount into my pension (BlackRock). I have opted - after reading on here - to add an additional 5% AVCs, which my employer will half match (0.5% for every extra 1% upto 2.5%). This will increase to straight matching (1% for every extra 1% unto 5%) next year.

    Historically, while we've been house-buying and getting established, I've been very remiss about pension contributions, and my total contributions to date are around £8k (all amalgamated into latest pension).

    I intend to stay with current employer for a few years, and have a six-month old daughter, and we are claiming child benefit. I have a student loan with circa £11k left, so by my estimates has around 3 years left to run (£309 / month).

    My Wife
    My wife has no pension whatsoever and is currently on maternity leave. She is going back to work next month and will earn around £600 per month with zero pension contributions. We will not have any additional childcare costs.

    The Question
    We have a couple of debts to pay off, although can comfortably meet repayments and save (well, overpay), and we should be fully square by early next year. I reckon we'll be able to save around £700 per month, at this point.

    However, with my income (and possible bonus) pushing me into a banding where I have to repay 100% of the child benefit, is it worth me making extra contributions over and above AVC? What would you do in this situation?

    Whilst I could afford to lower my take-home and up my pension contributions, I am eager to start saving (and investing in a S&S ISA), so I'm reluctant to eat away at the £700 month spare we'll have once debt payments cease.

    Keen to know what fellow MSE's opinion is? Would you sacrifice additional take-home pay to avoid tax/repaying child benefit? Do student loan payments get deducted from my salary for the purposes of calculating child benefit owed back to HMRC?
Page 1
    • Dazed and confused
    • By Dazed and confused 4th Sep 17, 10:27 PM
    • 1,691 Posts
    • 736 Thanks
    Dazed and confused
    • #2
    • 4th Sep 17, 10:27 PM
    • #2
    • 4th Sep 17, 10:27 PM
    Neither "salary" or student loan contributions have any relevance to paying back child benefit.

    The starting point would be taxable salary i.e. the taxable pay figure on your P60 and this should also be shown on each payslip. It can be significantly less than what you refer to as "salary".

    For full details you need to Google adjusted net income which is what the child benefit charge is based on.

    Remember pension contributions into a personal pension/SIPP do not reduce taxable income (they merely increases the amount of 29% tax you can pay) but they do reduce adjusted net income which is meaningless for most people but not those earning over £100k or are potentially subject to the High Income Child Benefit Charge.
    • dunstonh
    • By dunstonh 4th Sep 17, 10:36 PM
    • 89,436 Posts
    • 54,899 Thanks
    dunstonh
    • #3
    • 4th Sep 17, 10:36 PM
    • #3
    • 4th Sep 17, 10:36 PM
    However, with my income (and possible bonus) pushing me into a banding where I have to repay 100% of the child benefit, is it worth me making extra contributions over and above AVC? What would you do in this situation?
    Pay enough into the pension to bring you back below 50k again. As a higher rate taxpayer making overpayments on debt, the pension should be the better option (unless the debt is very expensive).

    Whilst I could afford to lower my take-home and up my pension contributions, I am eager to start saving (and investing in a S&S ISA), so I'm reluctant to eat away at the £700 month spare we'll have once debt payments cease.
    Why do you want an ISA which would only get 60% of the money that a pension would get for the same net contribution?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • xylophone
    • By xylophone 4th Sep 17, 10:54 PM
    • 22,855 Posts
    • 13,210 Thanks
    xylophone
    • #4
    • 4th Sep 17, 10:54 PM
    • #4
    • 4th Sep 17, 10:54 PM
    [QUOTE]My wife has no pension whatsoever and is currently on maternity leave. She is going back to work next month and will earn around £600 per month with zero pension contributions.

    Why is your wife not contributing to a workplace pension?

    https://www.gov.uk/workplace-pensions/joining-a-workplace-pension
    • fiisch
    • By fiisch 5th Sep 17, 12:06 PM
    • 160 Posts
    • 61 Thanks
    fiisch
    • #5
    • 5th Sep 17, 12:06 PM
    • #5
    • 5th Sep 17, 12:06 PM
    Thanks all - I am trying to save as there are things on the (distant) horizon that I would like savings for long before I hit 55 - namely school fees, moving house and a "rainy day" fund.


    I see that overall I am better off by reducing my Adjusted Net Income to under £50k, but it's the deferred gratification that I'm finding difficult (as so many do!!).


    My wife does not have a pension as she will not pay tax, so as a couple it seems counter-intuitive for her to pay money into a pension. I have explained the situation (and should the worst happen and we weren't together come retirement age), but frankly she's not particularly bothered and happy to rely on me!


    Appreciate there are some smaller tax advantages if she does pay into a pension, but as a couple it makes more sense to keep 100% of her salary and pay a larger proportion into my pension because of the tax brackets.


    I am thinking of a bit of a halfway house - try to get the net adjusted income to around £55k and look to keep around half of the child benefit we currently receive. Then look to review if and when child no.2 comes along.


    I see interest comes into earned account when calculating Adjusted Net Income - I am assuming this excludes interest earned in an ISA?
    • Dazed and confused
    • By Dazed and confused 5th Sep 17, 12:13 PM
    • 1,691 Posts
    • 736 Thanks
    Dazed and confused
    • #6
    • 5th Sep 17, 12:13 PM
    • #6
    • 5th Sep 17, 12:13 PM
    ISA interest (when rules are adhered to) is tax free and therefore not counted for adjusted net income or any other income tax purpose.

    But don't be misled by the new Personal Savings Allowance which implies you can have (as a higher rate payer) £500 interest tax free.

    All interest which was taxable prior to April 2016 when rules changed and PSA was introduced remains taxable so if you had say £500 interest this year as a higher rate payer then technically there is no tax to pay on it as it gets taxed at the PSA 0% rate but it is taxable income so your adjusted net income would still be £500 more and as a result you would have more Child Benefit to repay.
    • dunstonh
    • By dunstonh 5th Sep 17, 12:30 PM
    • 89,436 Posts
    • 54,899 Thanks
    dunstonh
    • #7
    • 5th Sep 17, 12:30 PM
    • #7
    • 5th Sep 17, 12:30 PM
    As I said, the important thing for me is whether I can take the whole of the DC as part of the tax-free lump sum.....
    That is not logical. If you use a savings account, you are doing it so you money in the future. If you use investments you are doing it so you have money in the future. If you clear debts more quickly, it is to improve the available money you have in the future.

    You seemed to have no problem with an S&S ISA but money invested in that is typically at least 10 years or more.

    My wife does not have a pension as she will not pay tax, so as a couple it seems counter-intuitive for her to pay money into a pension. I have explained the situation (and should the worst happen and we weren't together come retirement age), but frankly she's not particularly bothered and happy to rely on me!
    Actually, it is completely the reverse. it makes more sense for her to have a pension as she would get tax relief now, tax free growth and the income would be tax free in retirement as it would be within the personal allowance. Not using her personal allowance and having it in your name increases your tax bill by £2200 a year (using the current personal allowance - it will be more when you get there)

    Appreciate there are some smaller tax advantages if she does pay into a pension, but as a couple it makes more sense to keep 100% of her salary and pay a larger proportion into my pension because of the tax brackets.
    If £2,200 a year (in todays terms) is a small amount to you then fair enough. over 30 years of retirement that is around £66,000. Do you still consider it small?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • xylophone
    • By xylophone 5th Sep 17, 12:42 PM
    • 22,855 Posts
    • 13,210 Thanks
    xylophone
    • #8
    • 5th Sep 17, 12:42 PM
    • #8
    • 5th Sep 17, 12:42 PM
    What are the details of the pension scheme offered by your wife's employer?

    Is it NEST/NOW/ other?

    If other, which of net pay/relief at source is used?
    • Alexland
    • By Alexland 5th Sep 17, 1:10 PM
    • 186 Posts
    • 99 Thanks
    Alexland
    • #9
    • 5th Sep 17, 1:10 PM
    • #9
    • 5th Sep 17, 1:10 PM
    Personally I ensure there is enough going into my pension to avoid both 40% tax and child benefit claw back although in good bonus years it will be tight against the £40k pension contribution limit. This year total contributions will be about £35k. I am careful not to pay in more than a small safety margin at the 20% rate to mimise the risk of the overall pensions value hitting the lifetime allowance in future.

    We are lucky in that our local schools are good and we like our big house which is mostly paid so we don't intend to to spend much in the next 25 years before we hopefully retire early. Our only other debt is credit card for stoozing offset against regular savers.

    Even if your wife is a 0% or 20% taxpayer then there is a still tax refund available (even if tax was never paid on the income) and a good chance a proportion of her small pension will be drawn out tax free in future (not just the 25% but also against her annual income tax allowance) plus she is missing out on employer contributions and potentially a higher NI saving than you would achieve.

    Also if your wife is a low earner have you considered moving some of her tax free allowance to yourself?
    Last edited by Alexland; 05-09-2017 at 1:18 PM.
    • mark5
    • By mark5 5th Sep 17, 4:31 PM
    • 1,185 Posts
    • 801 Thanks
    mark5
    I see this as your lucky to have a decent pension contribution from your employer but your letting your pension provision down by paying in very little yourself, people earning half what you do manage to make larger contributions.

    10% I would consider to be the minimum I would be paying in myself.

    Obviously your living costs will probably be lower as you get older but there's going to be about 42k to make up between your state pension and what you earn now!
    • stoozie1
    • By stoozie1 5th Sep 17, 7:08 PM
    • 303 Posts
    • 148 Thanks
    stoozie1
    @alexland, your suggestion is good of using marriage allowance, but requires OP to make even more pension contributions/gift aid contributions to reduce income to £45k?
    • stoozie1
    • By stoozie1 5th Sep 17, 7:11 PM
    • 303 Posts
    • 148 Thanks
    stoozie1
    OP we pay into my pension as a v low earner, because of the double benefit outlined ably above. I am a SAHM mostly but sort out the family finances.

    I wish I had known about the 2880/3600 for low earners years ago!
    • Alexland
    • By Alexland 5th Sep 17, 10:09 PM
    • 186 Posts
    • 99 Thanks
    Alexland
    Yup a big income reduction but very tax efficient. To be honest school fees would be so crippling it's hard to pay them from income without paying 40% tax and loosing child benefit. My wife works part time but is likely to give up work completely if we have another child so we are putting 80% of her income into a pension and will then drop down to 2880/3600 per year from my income.
    • fiisch
    • By fiisch 5th Sep 17, 10:31 PM
    • 160 Posts
    • 61 Thanks
    fiisch
    Whoa thank you - this is why I love this site. Some serious food for thought. So, with the help of Google and some back of the fag packet calculations, if I was to increase my AVCs from 5 - 25%, this would mean that:

    - My Net Adjusted Income would be considered as £44.75k;
    - Monthly take-home pay would reduce £603;
    - Would retain child benefit at £89.70 per month;
    - Would qualify for marriage tax allowance at £19 / month (£230 divided by 12 months).

    So the net monthly reduction in take-home would be approximately £495.

    Meanwhile, for my pension this would mean:

    - AVC contribution would increase from £245 to £1230;
    - Added to employer 10% standard and 5% matched contribution of £737.50;
    - Monthly contributions would increase to £1968 (previously £983.33).

    So essentially, in my pension, I'd be £985 better off a month, at a "cost" to me of £495 / month. Have I got that right?!?!

    This does assume the money would not be better served paying off mortgage or placed into savings, but is incredibly tempting....I had not previously factored in marriage allowance nor considered just how big a difference this would make to the pension.

    To put this into context, I am a contractor who has recently gone permanent, and will stay permanent for a few years while baby(ies) at home, so this makes particular sense in the meantime to get my pension up and running....

    Thanks again - some really useful advice.

    re.: my wife's situation - I am not sure what pension is on offer, except that when offered she immediately opted out!! Will get her to find out her pension plan when she does start work at the end of the month, but between me upping mine and her contributing, we'd be struggling to pay the bills in the here and now...!
    Last edited by fiisch; 05-09-2017 at 10:40 PM.
    • fiisch
    • By fiisch 6th Sep 17, 10:57 AM
    • 160 Posts
    • 61 Thanks
    fiisch
    One more question.... does Childcare Vouchers purchased direct from employer (pre-tax) also affect the calculated Net Adjusted Income figure?
    • zagfles
    • By zagfles 6th Sep 17, 11:09 AM
    • 12,238 Posts
    • 10,169 Thanks
    zagfles
    One more question.... does Childcare Vouchers purchased direct from employer (pre-tax) also affect the calculated Net Adjusted Income figure?
    Originally posted by fiisch
    Yes, if it reduces your taxable income it'll reduce ANI.
    • michaels
    • By michaels 6th Sep 17, 12:02 PM
    • 19,209 Posts
    • 88,141 Thanks
    michaels
    Whoa thank you - this is why I love this site. Some serious food for thought. So, with the help of Google and some back of the fag packet calculations, if I was to increase my AVCs from 5 - 25%, this would mean that:

    - My Net Adjusted Income would be considered as £44.75k;
    - Monthly take-home pay would reduce £603;
    - Would retain child benefit at £89.70 per month;
    - Would qualify for marriage tax allowance at £19 / month (£230 divided by 12 months).

    So the net monthly reduction in take-home would be approximately £495.

    Meanwhile, for my pension this would mean:

    - AVC contribution would increase from £245 to £1230;
    - Added to employer 10% standard and 5% matched contribution of £737.50;
    - Monthly contributions would increase to £1968 (previously £983.33).

    So essentially, in my pension, I'd be £985 better off a month, at a "cost" to me of £495 / month. Have I got that right?!?!

    This does assume the money would not be better served paying off mortgage or placed into savings, but is incredibly tempting....I had not previously factored in marriage allowance nor considered just how big a difference this would make to the pension.

    To put this into context, I am a contractor who has recently gone permanent, and will stay permanent for a few years while baby(ies) at home, so this makes particular sense in the meantime to get my pension up and running....

    Thanks again - some really useful advice.

    re.: my wife's situation - I am not sure what pension is on offer, except that when offered she immediately opted out!! Will get her to find out her pension plan when she does start work at the end of the month, but between me upping mine and her contributing, we'd be struggling to pay the bills in the here and now...!
    Originally posted by fiisch

    Yep we do all of that (and a lot more).

    If you want to contribute anymore below this level it is probably worth doing it in your wife's name as it is likely that when she comes to receive her pension it will be taxed at a lower rate than yours will be.

    My pension contributions are done as salary sacrifice which means I save on both income tax and NI and then my employer chips in some of the saving they make on NI too (an additional 10% of my contributions).
    Cool heads and compromise
    • michaels
    • By michaels 6th Sep 17, 12:06 PM
    • 19,209 Posts
    • 88,141 Thanks
    michaels
    ISA interest (when rules are adhered to) is tax free and therefore not counted for adjusted net income or any other income tax purpose.
    Originally posted by Dazed and confused
    Ooh - now that got me googling and I discovered that isa income is also ignored when stating income for tax credits purposes - tax credits withdrawal rate is 41% so interest income (above £300) currently is effectively taxed at 41% but now I discover than in an isa it would be 'tax' free.

    Only problem is my 'stash' is currently in instant savings accounts paying on average 2.2% and I don't think I would be able to get any where near this in a ISA.
    Cool heads and compromise
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