AVCs and Tax . . . . help, v confused.

The_Salad

Let says I earn £44,200 per annum so £200 in to the 40% tax bracket.

I pay in to a Company organised AVC scheme £500 per month which I'm told is taken from my salary before tax and NI contributions. But do I get 40% tax relief on the full £6,000 saved each year or 40% on £200 and 20% on £5,800 ?? How does it work?

Let say I also get an annual bonus of £10,000 - how does that affect te equation?

Hoping someone can help.

Thanks.

Old_Slaphead

You only get HR relief on the HR actually paid ie on £200.

If you get a £10,000 bonus and pay HR on that then you'd get relief on full £6000 AVC.

Obviously the bonus has to be paid in same tax year.

The_Salad

Thanks.

So will my £10k bonus be taxed in full at the higher rate (HR?). Or should I receive a 20% rebate given that I've only had 20% tax relief on AVC contributions of £5,800?

My company pay tax and NI at source so its all done for me.

hugheskevi

Let says I earn £44,200 per annum so £200 in to the 40% tax bracket.

Higher rate tax threshold, assuming that you have a standard Personal Allowance, is £43,875 in 2010/11.

I'm told is taken from my salary before tax and NI contributions

This sounds as if it is a salary sacrifice scheme (they have various names, eg salary exchange, SMART pensions, but they mean the same thing). There is a sticky at the top of the pensions thread about this you should famiarise yourself with.

This means you not only get income tax relief, but probably also get relief on National Insurance Contributions (NICS). This is important, as on income up to the higher rate tax threshold you pay 11% NICS (assuming there isn't a contracted-out pension scheme) whereas on income over higher rate tax threshold you pay 1% NICS. Your employer also pays 12.8% employer's National Insurance on all earnings.

You should examine exactly how your employer operates the salary sacrifice - some will put all the savings from both the employee and employer National Insurance contributions into your pension pot, some will hold some money back to pay for the scheme. But however it is done, you are likely to be saving at least an extra 1% of NICS on higher rate contributions and 11% on basic rate contributions due to NICS relief.

But do I get 40% tax relief on the full £6,000 saved each year or 40% on £200 and 20% on £5,800 ?? How does it work?

You get higher rate tax relief on contributions made out of income taxed at higher rate, and basic rate relief on contributions made out of income taxed at the basic rate. So assuming £44,200 income and £6,000 of contributions that is £325 at 40% income tax relief and the rest at 20% income tax relief.

But as it is a salary sacrifice scheme, you are likely to be getting at least 41% income tax and NICS relief combined on higher rate income, and 31% tax and NICS relief on basic rate income.

Let say I also get an annual bonus of £10,000 - how does that affect te equation?

Think of it in terms of:

Taxable income - £43,875 = Higher rate income

At the moment, we are assuming taxable income is £44,200. If you add £10,000 to that it is £54,200, meaning you would have a total of £10,325 income in the higher rate band. So the first £10,325 of pension contributions would be eligible for higher rate relief, contributions above that get basic rate relief.

So will my £10k bonus be taxed in full at the higher rate (HR?). Or should I receive a 20% rebate given that I've only had 20% tax relief on AVC contributions of £5,800?

PAYE should sort it all out as your employer sorts out the pension contributions from gross salary. If you have been making £500 p/m contributions from an expected income of £44,200 and then get a £10K bonus during the tax year, only some of it will be taxed at 40%, as PAYE sorts it out and smoothes the new total amount of tax due over the remainder of the year.

Old_Slaphead

Your bonus will attract HR via PAYE system.

You claim tax back at year end (5th April) via tax return - if one isn't received write to tax office requesting repayment.

Old_Slaphead

hugheskevi wrote: »

This sounds as if it is a salary sacrifice scheme

How do you deduce that ?

hugheskevi

How do you deduce that ?

From OP's original statement:

I pay in to a Company organised AVC scheme £500 per month which I'm told is taken from my salary before tax and NI contributions.

Old_Slaphead

If that's the case (which isn't the way I saw it) I'm rather surprised that OP doesn't know that deductions are being made under a salary sacrific arrangement. Your quote suggests conventional (ie they are paid by employee not employer) AVC contributions.

vbm

Sounds to me like the OP makes contributions under a 'net pay' arrangement, rather than a salary sacrifice.

Damask

I agree with Kevin - the amount of national insurance payable is the same under a net-pay arrangement and a relief at source arrangement. This is because NI is calculated from your gross salary.

If the pension deduction affects the amount of NI payable - then it has to be salary sacrifice.

Old_Slaphead

One way to find out ......


The Salad - do you have a salary sacrific arrangement?