AVCs versus tax credits

RazorReddo

Hi my name is Graham,
I am a working Dad. I have 6 kids. Three to an ex and 3 to my current wife. I pay my child maintaince and always will. I am finding it very hard to cope with my finances. My employer has recently said they are going to stop our final salary pension scheme. With this in mind I was thinking of making some AVC annual voluntary contributions to my pension. And the thought hit me!!! Whollop!

If I put say £200 a month into my pension using AVCs, will my tax credits go up?
As I see it, your tax credits are judged on your TAXABLE PAY.......can anyone clarify or help?
Regards
Graham

[Deleted User]

I maybe wrong but arent AVC`s taken off taxed pay,not before?

RazorReddo

Im not sure John, thats why i am posting:beer:
can anyone help?

[Deleted User]

AVC'S are taken of after tax so won't effect your Tax Credit as this is based on gross earnings. However if you were able to donate to your pension via salary sacrifice then yes this would reduce your gross pay and therefore up your Tax Credits.

zagfles

Deleted_User wrote: »

AVC'S are taken of after tax so won't effect your Tax Credit as this is based on gross earnings. However if you were able to donate to your pension via salary sacrifice then yes this would reduce your gross pay and therefore up your Tax Credits.

This is the wrong way round. AVCs are, or should be, taken off before tax is applied, so they reduce your taxable pay. The payroll system should do it but if it doesn't you can claim the tax back. Contributions you make to pension schemes reduce your income for the purposes of tax credits as well as income tax. They don't reduce your NI'able pay (ie the income you pay national insurance on)

But salary sacrifice is different. It will reduce your taxable and NI'able pay (which is why employers like it - it reduces their NI as well). But unless the sacrifice is for childcare, it might not reduce your income for tax credits purposes.

I think this is because the tax credits legislation specifically allows pension contributions by the individual to be deducted from income, but salary sacrifice is different as you are not directly contributing to your pension, you are accepting lower pay in return for your employer doing so. This could count as "notional income".

I tried to post links to the hmrc site to support the above but this forum is not letting me post links, even to .gov.uk websites!

RazorReddo

Hi Guys,
Not sure whos right here. Ive tried HMRC but they told me to speak to my employer......NO WAY they hate me!
Does anyone know anyone who is a professional in the field of Tax and Tax Credits and pensions. i dont want to do this and it all falls apart.

zagfles

RazorReddo wrote: »

Hi Guys,
Not sure whos right here. Ive tried HMRC but they told me to speak to my employer......NO WAY they hate me!
Does anyone know anyone who is a professional in the field of Tax and Tax Credits and pensions. i dont want to do this and it all falls apart.

If you google "avcs gross pay" (without the quotes) you'll see lots of examples of employer schemes which state that AVCs are taken off gross pay before tax is applied - so reduce your taxable pay.

Salary sacrifice will also reduce your taxable pay, but the tax credits manual states that unless the salary sacrifice is for childcare, the tax credits office will want to look into the exact details of the sacrifice before making a decision. There's a rule about working for less that the going rate, which I guess a salary sacrifice could be classed as.
I've listed the relevant tax credits manual pages below, you can search for them on the hmrc site or on google.

ntc0175040
ntc0175030
TCTM04805