pension payment tax relief and NI

artha

Much mention is made of tax benefits for pension contributions whether they are main scheme or avc. I pay both. But is the relief as much as you think?
I was discussing with someone form our HR dept the possibility of paying all my monthly salary into my avc to be able to withraw it as tax free cash shortly afterwards. I was told however that this was not possible as I would still have to pay NI on my salary. They didn't go into detail but I assume that this is 11% of my salary. Can someone enlighten me please? Does this mean that I am not actually saving 20% deductions but only 9%?

MrChips

I believe NI is due on your "earnings". If your employer pays you and you choose to put these earnings into a registered pension scheme, you will have to pay NI on the earnings but you will get tax relief at 20% (basic rate payer) or 40% (higher rate payer).

Some companies operate salary sacrifice whereby instead of paying you and you making the contribution, they make the contribution on your behalf. Then there is no NI to pay as you never really got the money in the first place.

The figures in your last sentence are wrong. In total, you pay 31% from your salary in NI and tax (on your earnings above circa £6000). After the 20% tax relief, this leaves 11% NI.

Your idea could still work if you can persuade your employer to sacrifice 100% of your salary and pay it into your pension fund on your behalf.

CLAPTON

I'm not sure exactly what you are saying

-why do you think you can withdraw your AVCs shortly after?... 25% maybe

-currently you pay 20% tax and 11% NI (assuming you're not a 40% tax payer AND you are not opted out of the state 2nd pension ) so you paya marginal rate of 31%... if you pay into a AVC you only pay 11% NI and no tax so saving 20%.

MrChips

I think you could withdraw 100% of AVCs tax free in certain circumstances.

For instance - if the OP is in a pension scheme that accrues pension at a rate of 1/80 of final salary per year of service and a lump sum of 3/80 and he accrued £10,000 pa pension and a lump sum of £30,000. He could pay his entire salary into the AVC pot the year before retirement, say £20000.

He can then take the whole £20000 as a tax free lump sum the following month as total lump sum of £50000 would be less than 25% of the value of his benefits.