LGPS, non-income-tax payer, and tax relief

FatherAbraham

I've been to help an LGPS member analyse the benefits of an additional regular contributions contract, and I'm failing to understand the tax treatment.

The scheme's documentation on the ARC payments states that they're deducted from pay before income tax is calculated, thereby giving instant tax relief at the employee's marginal rate.

However, the employee in question is a low-paid part-timer, who pays no income tax on salary at all. Deducting the ARC payment from her salary gives no tax relief at all.

Indeed, looking at her payslips, I see that even the 6.5% normal employee contribution to LGPS is taken as 6.5% of her salary -- so there's no tax relief being applied there.

How does she get the tax relief? Does she have to make a claim to HMRC? Or is this some special case affecting occupational pensions which I known nothing about, whereby low-paid workers don't get any tax relief?

(My experience is entirely with tax relief on DC contributions, where an employer contribution of 6.5% would be deducted as 5.2% of net salary, and the pension scheme would claim the tax relief from HMRC. I know the world of DB is totally different, can anyone please enlighten me so I don't look like a complete idiot when trying to explain what's going on?)

Thanks.

Drp8713

As far as im aware it is exactly as you say.

Your contributions are taken gross, before tax is applied.

If you dont pay tax, you dont get tax relief.

I have never heard of anybody contacting HMRC to ask for it, as where would they pay it? Being final salary the contributions arnt used in the calc so getting the relief would just make the employer better off not the member

zagfles

As I understand it non taxpayers can only get tax relief on contributions made to a RAS (relief at source) type scheme. The distinction isn't between DB and DC schemes, most occupational DC schemes also use "net pay" ie deduct pension conts from salary before applying tax.

Maybe ask the scheme administrators, or use a personal pension instead of ARCs (though obviously weigh up the benefits, don't let the tax treatment be the only deciding factor!)

xylophone

http://www.accountingweb.co.uk/anyanswers/tax-relief-personal-pension-contributions-low-earner

http://www.lgps.org.uk/lge/core/page.do?pageId=100827 (figure not updated for 2013-14 tax year).

http://www.yourpension.org.uk/LPFA/Scheme/LGPS-guide/Increase-Your-Benefits.aspx

Above might be of interest.

FatherAbraham

Drp8713 wrote: »

I have never heard of anybody contacting HMRC to ask for it, as where would they pay it? Being final salary the contributions arnt used in the calc so getting the relief would just make the employer better off not the member

HMRC would pay it to the employee in the form of a cheque, not to the employer. It's the pension-scheme member who made the contributions who gets the tax releif.

Warmest regards,
FA

Drp8713

FatherAbraham wrote: »

HMRC would pay it to the employee in the form of a cheque, not to the employer. It's the pension-scheme member who made the contributions who gets the tax releif.

Warmest regards,
FA

Yes, but what i mean is, in a personal pension I pay £100, the taxman pays £25 into the same scheme, my pension fund.

In a DB scheme, the pension fund is not yours, its the employers to keep funded, if you pay your £100, the £25 would surely have to be paid into the same scheme, which would not benefit you as your getting 1/60th x service x FTE pay regardless.

Daniel54

Drp8713 wrote: »

Yes, but what i mean is, in a personal pension I pay £100, the taxman pays £25 into the same scheme, my pension fund.

In a DB scheme, the pension fund is not yours, its the employers to keep funded, if you pay your £100, the £25 would surely have to be paid into the same scheme, which would not benefit you as your getting 1/60th x service x FTE pay regardless.

In all the DB schemes I paid into,the employee contribution was paid gross to the employer and the employee would get a tax offset credited in the same payslip.

Bear in mind the scheme is the responsibility of the trustees and is not owned by the employer.You are correct that it is the responsibility of the employer to keep the scheme sufficiently funded to pay the benefits,and the employer will in turn receive tax relief on it's contributions.

jem16

FatherAbraham wrote: »

HMRC would pay it to the employee in the form of a cheque, not to the employer. It's the pension-scheme member who made the contributions who gets the tax releif.

Warmest regards,
FA

A non-taxpayer would normally be entitled to tax relief on £3600. Basic rate tax relief would normally be added to your pension contribution via your pension provider. As there is no pot of money in a defined benefit scheme, there is nowhere to pay it.

Daniel54 wrote: »

In all the DB schemes I paid into,the employee contribution was paid gross to the employer and the employee would get a tax offset credited in the same payslip.

As the contribution is made before tax is taken, it just means a reduction in tax as opposed to a credit in tax.

magpiecottage

This is one of those situations where an personal pension would probably be a better bet than an in house AVC.

Assuming the member is looking to pay into a defined contribution arrangement where they get whatever is in the pot at retirement in the AVC then they will only get their own money plus growth.

On the other hand, if they pay it into a personal pension, they will get tax relief on it even though they have paid no tax. Thus, as Jem16 suggests, if they paid £3,600 (the maximum a person with insufficient earnings to pay tax could put in), they would pay £2,880 per annum and HMRC would pay a further £620.

jem16

magpiecottage wrote: »

This is one of those situations where an personal pension would probably be a better bet than an in house AVC.

It's not an AVC that's being looked at but an ARC which is the LGPS term for Additional pension - ie defined benefit.

hugo15

This is just the question I have been meaning to ask for ages. My wife works as a school dinner lady and is a member of the LGPS. As part of our joint pension planning I have been thinking about ARC payments for her to boost her pension. If there is no tax relief is this still a good choice or are there better options?