Diverting £50k of salary into pension fund to claim welfare benefits

Zelazny

thistledome wrote: »

I said "I don't understand why anyone is condoning the OP". I am talking about the people who are condoning the OP. If you are not condoning the OP, then the post isn't about you.

Just to be clear: I'm saying I don't understand.

I'm not saying: "everybody is condoning OP"

nor am I saying:

"nobody should be condoning OP", as everyone's entitled to their opinion.

Hope that clears things up.

Sorry if I sound tetchy, this forum has broken my brain today with all the misconstruing I've had :rotfl:

The way I see it, the government has placed itself as arbiter of right and wrong. By creating laws, they determine what we are and are not allowed to do. I don't always agree with their laws and certainly don't feel compelled to follow them, but considering the potential risks of not following them I generally do.

So the government has said "If you do these things, then all is well and you won't be punished, whereas if you do these other things we will send you to jail."

By creating the laws that they have created, they are explicitly stating that certain actions are acceptable and to a certain extent expected.

One of the things that they have said is that for a single parent with three children in the OPs situation who earns £12.1k, they would effectively top up the wages to £63k. On the other hand, for someone on the OPs situation who earns £65k, they would give only child benefit, which tops up the salary to effectively £67.5k. There are plans to remove this child benefit.

The government have also said that if you contribute pension through salary sacrifice, it doesn't count for calculating benefits and that the maximum you can contribute to pensions if £50k per year.

So the government have effectively said that it's fine to drop your salary and get benefits.

The problem is that this gives the OP a choice:

effective salary £67.5k (dropping to £65k shortly)

or effective salary £63k plus £50k of pension contributions - total effective salary £113k.

The fact that the benefits system implicitly allows this means that the government clearly think that such behaviour is fine.

The OP must have paid a lot of tax to get to the position he's in now, and so it seems only reasonable that he get a little bit back. I have no problem with this.

I do think that the benefit system is grossly over-generous and needs to be fixed, but that's a separate problem. In the OPs case, it's a no-brainer.

zagfles

Zelazny wrote: »

With three kids, I get the following (using the calculator at https://www.turn2us.entitledto.co.uk/ based on single adult with three kids and 12.1k salary):

157.22 pw child tax credit
218.68 pw working tax credit
34.77 pw council tax benefit (I put down a council tax bill of £1,980 pa as in the OPs post #7)
164.94 pw Housing benefits (I put in LHA allowance of £750 pm as in OPs post #7)
47.10 pw child benefit

Total 622.71 pw.
= 32,558.88 pa.

Bear in mind that these figures are not taxable. The OP also has 12.1k taxable income, which should give a net amount of £10,590.36 after tax and NI, giving total net income of:
£43,149.24

In order to have this much left after you've paid tax and NI you'd need to earn somewhere in the region of £63k.

The WTC looks much too high - did you include childcare? If you sacrifice salary for vouchers then you need to deduct the amount you're paying through vouchers from the amount you claim through tax credits, ie you can't claim twice for the same thing.

Without childcare WTC would only be about £45pw.

Besides which a large salary sacrifice almost certainly won't work for means tested benefits (LHA/HB/CTB). There are notional income rules which would be used:

http://dwp.gov.uk/docs/hbgm-bw2-assessment-of-income.pdf

If a claimant performs a service for someone and that person makes no payment, or pays less than is usually paid for comparable employment, treat the claimant as having such notional earnings as you consider reasonable for that employment, unless the claimant can show the person for whom they provide the service is unable to pay or to pay more than has been paid.

Tax credits have very similar notional income similar rules, but the difference is that pension contributions are 100% deductible for tax credits, they are only 50% deductible for HB/CTB/LHA.

In theory its possible even tax credits could pull the notional income rule for any salary sacrifice, and until a few months ago they would investigate any salary sacrifice scheme (unless for childcare). Including for pension. But possibly they would then have to treat the employee as having made the pension contributions from gross salary, so making no difference to the tax credits claim.

But it would make a difference to the HB/CTB/LHA claim as pension conts are only 50% deductible. So they would assess the OP on a £37k salary - too high for HB/CTB/LHA.

The other thing to bear in mind is that the £50k limit for pension conts includes employer contributions.

Zelazny

zagfles wrote: »

The WTC looks much too high - did you include childcare? If you sacrifice salary for vouchers then you need to deduct the amount you're paying through vouchers from the amount you claim through tax credits, ie you can't claim twice for the same thing.

Without childcare WTC would only be about £45pw.

I just used the calculator on the linked website - it may be incorrect, but I'd be surprised if so.

zagfles wrote: »

Besides which a large salary sacrifice almost certainly won't work for means tested benefits (LHA/HB/CTB). There are notional income rules which would be used:

http://dwp.gov.uk/docs/hbgm-bw2-assessment-of-income.pdf

This sounds like it might have some teeth to it, although the answers from the tax office helpline make me wonder if they have a policy of ignoring salary sacrifice?

zagfles wrote: »

Tax credits have very similar notional income similar rules, but the difference is that pension contributions are 100% deductible for tax credits, they are only 50% deductible for HB/CTB/LHA.

In theory its possible even tax credits could pull the notional income rule for any salary sacrifice, and until a few months ago they would investigate any salary sacrifice scheme (unless for childcare). Including for pension. But possibly they would then have to treat the employee as having made the pension contributions from gross salary, so making no difference to the tax credits claim.

But it would make a difference to the HB/CTB/LHA claim as pension conts are only 50% deductible. So they would assess the OP on a £37k salary - too high for HB/CTB/LHA.

Employee conts are only 50% deductible, but employer conts are not taken into account at all, and salary sacrifice is employer contribution.

zagfles wrote: »

The other thing to bear in mind is that the £50k limit for pension conts includes employer contributions.

Agreed - with employer conts as well, the OP would not actually be able to reduce salary by 50k without additional tax issues.

zagfles

Zelazny wrote: »

I just used the calculator on the linked website - it may be incorrect, but I'd be surprised if so.

The turn2us calculator is very accurate in my experience. But that figure for WTC is completely wrong unless you included childcare. The max WTC you can get without childcare or disabilities is 1920+1950+790=4660. And that is tapered at 41% for income over £6420.

This sounds like it might have some teeth to it, although the answers from the tax office helpline make me wonder if they have a policy of ignoring salary sacrifice?

That's tax credits. Means tested benefits are different.

In any case tax credits don't ignore salary sacrifice. See the manual page I quoted earlier which instructs tax credits staff how to operate: http://www.hmrc.gov.uk/manuals/tcmanual/TCM0044060.htm

They ignore it for specific purposes. This used to be just childcare, but now includes pensions.

For benefits there's probably some similar guidance, but they will almost certainly include sacrifice for pension as that's only 50% dedictible had the employee contributed direct rather than via a sacrifice.

Agreed - with employer conts as well, the OP would not actually be able to reduce salary by 50k without additional tax issues.

Although - the £50k can be averaged out over a few years. If you really want an advanced course of taking the p out of the tax credits system, you'd make use of the income increase disregard as well...though this was much better a few years ago when there was a £25k disregard for income increases. Accountants were even recommending this...you could get 98% relief on your pension conts, and that was without using salary sacrifice.

Now the disregard is only £10k for increases and next year there's a disregard for income drops of £2500, still a difference so may still be worth making "lumpy" pension conts.

atush

The fact that the benefits system implicitly allows this means that the government clearly think that such behaviour is fine.

I don't think so. I think they just didn't realise someone would use theis loophole. I think that they aren't quite so forward thinking as that in HMRC ;-)

Zelazny

atush wrote: »

I don't think so. I think they just didn't realise someone would use theis loophole. I think that they aren't quite so forward thinking as that in HMRC ;-)

I dunno - what's an MP make? A little over £60k? Perhaps they're all doing it too

shays_mum

Been doing some reading about this I gather this scheme is only available to employees, as opposed to someone being self-employed?

If your a LTD company, would this still be workable?

Still abit confused, but thanks for the interesting read eh!

jamesd

If your income is low enough, yes.

YORKSHIRELASS

Without getting into the moral debate we are a family who have to live on an income of £12k plus benefits. We have a disabled child (hence why I am not currently working). We receive a total of £920 a month for Tax Credits and Working Tax Credits which I actually think is quite generous. This includes the severe disability element. Your figures do seem quite high but I havent checked them and they may be correct.

Even with Disability Living Allowance, Carers Allowance and Child Benefit our income is far less than £3k a month.

zagfles

shays_mum wrote: »

Been doing some reading about this I gather this scheme is only available to employees, as opposed to someone being self-employed?

If your a LTD company, would this still be workable?

Still abit confused, but thanks for the interesting read eh!

I don't think you'd be able to use "salary sacrifice" or anything like it if you're self-employed, possibly if you're a LTD company but you'd need to be very careful about how the salary sacrifice scheme is set up (HMRC have rules as to whether it is "effective" or not such as a contract change stating you can only make the change once a year or in certian circumstances such as a "life event").

But anyone can make normal pension contributions and they will reduce your income for tax credits (google TC825).

I very much doubt it would work at all, for anyone, for benefits (eg HB/LHA/CTB), as above.