Using pension contributions to trigger bigger student loan

PeacefulWaters

Does it work?

With various BIK my gross income will be £50k and Mrs PW around £15k. Both have salary sacrifice pensions, mine DB and AVC.

If we could contribute £36k to pensions between us am I right in saying that this would, a couple of years later, trigger a larger student maintenance loan and grant for the offspring?

Are there rules that prevent this?

What's the lowest I should allow Mrs PW's income to drop to without affecting the new flat state pension?

Is there anything else I need to consider (tax relief optimisation over multiple tax years v a single tax year seems to be an issue).

I've just come up with this scheme so would really appreciate you dissecting it further before I make a huge mistake!

Link to MSE article with key table towards the bottom, 13..

zagfles

Can't see why not, AIUI pension contributions are deductible from household income for the purposes of student loans/grants. The govt seem quite happy for people to use pensions to reduce income for the purposes of child benefit & tax credits, why not for student loans/grants. Maybe even bursaries.

But you're best asking on the Students money board - there's at least one person on there who works for the students loan company.

PeacefulWaters

Thanks for that., it's appreciated. The student forum looked sparsely populated so I chose here.

My keenest interest is around the margins, eg higher rate tax relief and lowest earner still paying the right level of NI for the flat state pension.

Dunnit

You would have to reduce the payments over the lifetime of the course as while they only check the paperwork in the first year they do ask if there have been any material changes each year thereafter.
You cannot do salary sacrifice to take wages below the national minimum pay rate but you can still pay into a PP or SIPP which would count against income for this purpose.

PeacefulWaters

Dunnit wrote: »

You would have to reduce the payments over the lifetime of the course as while they only check the paperwork in the first year they do ask if there have been any material changes each year thereafter.

The money will be available June 2016.

The youngest should start uni in September 2016.

If I've got the lag right it'll only work for his third year. 2018/9.

Pondering selling some shares and sacrificing a chunk of savings for an earlier year now!

zagfles

PeacefulWaters wrote: »

Thanks for that., it's appreciated. The student forum looked sparsely populated so I chose here.

My keenest interest is around the margins, eg higher rate tax relief and lowest earner still paying the right level of NI for the flat state pension.

For the new flat rate you just need to earn at least the LEL, ie £111pw, £5772pa. Payments to a SIPP won't reduce NI'able income, only salary sacrifice will, and you can't salary sacrifice below the NMW anyway.

So unless she only does 17 hours a week or so it won't be an issue. Employers often ban salary sacrifice which takes you below the LEL anyway for obvious reasons. Plus unless she has other income, it's pointless tax wise as she won't get tax relief for sal sac below the personal allowance, so she'd be better off paying into a SIPP/personal pension.

For the current state pension (which depending on her history may give a bigger foundation amount on the switchover) if she earns below the low earnings threshold (£15100 this tax year) sal sac will make no difference assuming it doesn't go below the LEL. It won't make a great deal of difference if she's above this anyway, though it will reduce additional pension a bit.

PeacefulWaters

zagfles wrote: »

For the new flat rate you just need to earn at least the LEL, ie £111pw, £5772pa. Payments to a SIPP won't reduce NI'able income, only salary sacrifice will, and you can't salary sacrifice below the NMW anyway.

Great. This is where my fairly decent generic knowledge can be taken to more useful levels.

So unless she only does 17 hours a week or so it won't be an issue.

24.

Employers often ban salary sacrifice which takes you below the LEL anyway for obvious reasons. Plus unless she has other income, it's pointless tax wise as she won't get tax relief for sal sac below the personal allowance, so she'd be better off paying into a SIPP/personal pension.

For my clarity does this make sense.

1) Salary sacrifice her income down to the tax threshold.
2) SIPP contributions beyond this will still attract tax relief at 20%.

Have I played that back correctly?

For the current state pension (which depending on her history may give a bigger foundation amount on the switchover) if she earns below the low earnings threshold (£15100 this tax year) sal sac will make no difference assuming it doesn't go below the LEL. It won't make a great deal of difference if she's above this anyway, though it will reduce additional pension a bit.

Nothing of any significance. A chunk of her qualification comes from child benefit. There were half a dozen years contracted out. The rest is contracted in lowish income work earning over the tax allowance.

I really appreciate the feedback.

zagfles

PeacefulWaters wrote: »

Great. This is where my fairly decent generic knowledge can be taken to more useful levels.

24.

For my clarity does this make sense.

1) Salary sacrifice her income down to the tax threshold.
2) SIPP contributions beyond this will still attract tax relief at 20%.

Have I played that back correctly?

Yes, just make sure the gross SIPP contribution is not more than her earnings (eg £10k income after sal sac, max SIPP contribution should be £8k net - ie £10k gross). So you get to keep £2k of her earnings despite it all going into her pension!

Nothing of any significance. A chunk of her qualification comes from child benefit. There were half a dozen years contracted out. The rest is contracted in lowish income work earning over the tax allowance.

I really appreciate the feedback.

No worries. One thing to watch out for is she doesn't do any gift aid if she's paying no tax.

thenudeone

You do not need to plan pension contributions two years in advance.

Student Finance usually uses income from two years before the course, because that is the earliest tax year which the parents will have had to complete a tax return for, by the time they have to submit financial date to Student Finance (SFE)

To illustrate:
Tax year 2013/2014
Parent's Tax return has to be submitted 10 months after y/e: 31/01/2015
This Financial data will be requested by SFE in Spring / Summer 2015,
And will be used in calculating the student's entitlements for the 2015/2016 academic year, i.e. two years later than the financial data.

However, if the parent's income falls by more than 15%, they can get the student's award re-assessed on the current year's income.

Initially this will be an estimate but you will be asked to submit accurate numbers in April, which will lead to an adjustment (if necessary) in the student's award for that year.

The drop in income need not be outside of your control. It can be manufactured by your own decisions.

Specifically - If you decide to make higher pension contributions in the tax year corresponding to the first academic year, then, as long as you inform SFE promptly, they are obliged to re-calculate the student's award for that academic year based on your lower income (as defined by the rules).

You may need to be quite assertive to get the award re-calculated in these circumstances (I did), but that is how the rules are written and are as a result of the decision by successive governments to make providing for your own retirement by investing in a pension as attractive as possible, thus reducing future demands on the welfare state.

Many other awards such as bursaries depend on the SFE numbers too, but it is probably unlikely that these will be recalculated part way through the year.

What isn't clear to me is whether, once you have moved to current year assessment, the following two years will be based on the same tax year's income until the normal two-year lag is resumed, or whether you will be re-assessed on current year income for each of the following years. Having been assessed on actual income in year 1, it would be illogical to revert to using the previous year's income next year (which would be the normal rule).

kangoora

DW and I are planning to make large contributions to pensions over the next 4 years, much, much bigger than previous years. Mine through salary sacrifice and hers via a personal pension

Our eldest will start his 3rd year in Uni in September 2015 and has just received his student loan figures for that year.

Am I correct in assuming if he challenges the income figures for DW and I and provides our new, adjusted income then his loan/grant will be adjusted for Year 3 starting in September?

No. 2 son will hopefully start in September 2016 but we should have a year's worth of records by then.

For calculations, salary sacrifice is easy as my salary will be reduced.

For DW's personal pension, would her reduction in salary be the net or gross figure paid into her pension - I'm assuming net i.e. if she contributes £500/month her effective salary would reduce by £6000 and not the grossed up £7500?

zagfles

kangoora wrote: »

For DW's personal pension, would her reduction in salary be the net or gross figure paid into her pension - I'm assuming net i.e. if she contributes £500/month her effective salary would reduce by £6000 and not the grossed up £7500?

It'll be the grossed up amount, they use gross household income.