AVCs and tax benefits

GEA_2

I have taken advantage of a phased retirement for teachers and pay AVCs from my first salary. This gives me tax relief at 20%. However with my pension income, this pushes me into the higher tax bracket with the 2 combined. If I increased my AVC payments could I now expect this to give me a 40% tax benefit?

jem16

Yes but only for the amount you are actually in the higher rate by.

For example if you moved into the higher rate tax bracket by jyst £500 and paid pension payments of £2000 you would get 40% relief on the £500 and 20% relief on £1500.

GEA_2

Thanks for this: but I have had a change of advice from the AVC provider that no pension income can have an AVC set against it. My original plan was to boost my AVC by paying in a cash sum to try to reduce my higher tax liability when the 2 incomes were put together; the latest response is that I could only ever get 20% basic tax relief [i.e. based upon my first salary]. Do you think this is correct advice?

Graham

jem16

GEA wrote: »

Do you think this is correct advice?

Not entirely but it depends on the way it was worded.

Basically the pension provider claims the 20% tax relief on your behalf and puts it into your pension. You have to apply fior the other 20% via HMRC either through a coding change or via your tax return.

I don't know if AVC rules are any different but I get 40% tax relief on my personal pension payments, not because my salary makes me a higher rate taxpayer but because my total income of pension, salary and savings/dividend income does.

Debt_Free_Chick

This is an interesting situation.

If you had pension income, only - then you could pay £240 per month in to a pension plan. You can do this with no income at all. The pension provider would then add basic rate tax relief to your pension plan.

You have a combination of pension income and salary and pay tax at 40% on some of your income. Question is ... which part? Is it the salary or the pension?

I would argue that your pension contributions are being paid from your salary and you should get 40% relief on the relevant part. But I wonder how HMRC will see it ....?

I'll see if I can find something relevant, but a cross post to the tax board might help.

jem16

Debt_Free_Chick wrote: »

I would argue that your pension contributions are being paid from your salary and you should get 40% relief on the relevant part. But I wonder how HMRC will see it ....?

I've been filling in a self assessment tax return with HMRC since 2002. The personal pension was added in tax year 2006/7. It's clearly marked that some of my income comes from employment, some from a pension and some from savings/dividends. HMRC have certainly been giving me the extra 20% tax relief since then.

The only reason I started the pension was to keep me out of the 40% tax bracket so I wouldn't be very happy if HMRC suddenly decided I shouldn't be getting the extra tax relief.

EDIT : Come to think of it my pension contributions into my main teacher's pension scheme will have been getting 40% tax relief at source from 2002 as it reduces my taxable income as it's paid from gross salary. As I'm paying into the main scheme and buying back added years I'm paying around £350pm.

Debt_Free_Chick

jem16 wrote: »

I've been filling in a self assessment tax return with HMRC since 2002. The personal pension was added in tax year 2006/7. It's clearly marked that some of my income comes from employment, some from a pension and some from savings/dividends. HMRC have certainly been giving me the extra 20% tax relief since then.

The only reason I started the pension was to keep me out of the 40% tax bracket so I wouldn't be very happy if HMRC suddenly decided I shouldn't be getting the extra tax relief.

EDIT : Come to think of it my pension contributions into my main teacher's pension scheme will have been getting 40% tax relief at source from 2002 as it reduces my taxable income as it's paid from gross salary. As I'm paying into the main scheme and buying back added years I'm paying around £350pm.

I'm with you here. Arguably, you're paying the contributions from your earned income and as a higher rate taxpayer, you ought to get the higher rate relief on those contributions. I don't think there's an issue - just more an "interesting situation" and I wondered what HMRC's view was ....???

jem16

Debt_Free_Chick wrote: »

I don't think there's an issue - just more an "interesting situation" and I wondered what HMRC's view was ....???

As far as I'm concerned I am a higher rate taxpayer. However it's only my pension payments that make me that - salary and savings alone would not see me paying higher rate tax.

So is there some rule that says pension income doesn't count when deciding on tax relief?

Debt_Free_Chick

jem16 wrote: »

So is there some rule that says pension income doesn't count when deciding on tax relief?

Well, pension income doesn't count as "relevant earnings" HMRC determine how much you can pay in to a pension plan. If you had pension income only, then your relevant earnings would be nil and your contributions would be limited to the basic amount of £3,600 p.a.

But if your pension were £50k, would you get higher rate relief on that contribution ....? Looking at your situation, it seems that the answer is "yes". There's a mixture of "pension tax rules" and "personal income tax rules" here - with the pension tax rules determining the contribution you can pay and the personal income tax rules determining the rate of relief you get.

Giving the higher rate relief seems fair, but HMRC rules are not fair at all!

jem16

Debt_Free_Chick wrote: »

Giving the higher rate relief seems fair, but HMRC rules are not fair at all!

It is all a bit complicated in my situation. The pension income that I am receiving was my late husband's pension so technically I am paying tax on something I didn't get tax relief for in the first place (although obviously my husband did at the time). So I think my tax relief on my own pension contributions are quite fair.

I wonder if the OP will come back to let us know if he has had any further info from his AVC scheme?

jamesd

GEA wrote: »

I have had a change of advice from the AVC provider that no pension income can have an AVC set against it. ... Do you think this is correct advice?

Not quite. I think it means only that when paying AVCs into the work pension the pension income cannot be included by your work. The effect depends on how the work AVCs are taken.

Are they taken out of gross before tax salary by salary sacrifice? If yes then in effect you're getting higher rate relief anyway.

If not then you should discuss with HMRC because I think that you will be able to claim an extra 20% tax relief from HMRC. Maybe not, because it depends on how the two incomes are taxed, it's possible that neither is taxed at 40%, but that doesn't seem correct if it's happening and I expect that HMRC would want to give you a tax code that causes work to take higher rate tax from you.