Increasing pension contributions to enable eligibility for child benefit

jamesd

chile_paul wrote: »

£200k in savings split circa 60% in investments with the remainder in high interest current accounts and regular savers ... My salary (dependant on annual bonus) is in the range of £65k-£75k ... aim to bring my salary net of contributions down towards £50k so that I can also claim child benefit payments for my 2 children.

In order to be able to afford these additional pension contributions I would effect be in part at least living off my savings.

That's a good plan but you can do more.

Both the Child benefit rules and the Working Tax Credit rules specifically say that the income used for the calculations will be reduced by the value of pension contributions made. For the obvious reason that providing for the future is a good thing that will eventually save the state money vs those who don't.

I suggest that you instead consider something like this:

Year 1: pension contributions to restore Child benefit.
Year 2: pension contributions to restore Child Benefit and also get maximum Working Tax Credits.
Year 3: if needed, as year 1 to top up savings
Year 4: as year 3, if needed.

Given your level of savings you might consider just going down to the maximum Working Tax Credit payment level from the outset and stick there for a few years, then go back up to just CB level.

Alternatively or as well, you might look into whether some of the lower risk VCTs are suitable for you. VCTs provide income tax relief of 30% of the VCT purchase price. That can make them a very useful tool to eliminate income tax liability provided you pick ones that are suitable for you. You have to hold the VCT for at least five years or you must repay the tax relief, except after death. So in effect if you can defer some of your pay for at least five years you can make it mostly free of income tax.

I'm using this approach to eliminate most of my income tax liability. I've been mostly using the Albion VCT which in addition pays about 10% of the after tax relief buy price as tax exempt (actually exempt) dividend income and has a 5% discount policy when you eventually come to sell, limiting the potential selling time loss after five plus years. the Albion VCT has recently been funding a new school and some new care homes so it's also a socially useful investment option.

The VCT method has the advantage that the money remains outside a pension pot so it's available at need and in any case after five years.

A disadvantage is that VCT buys do not reduce the income used for CB or WTC calculations so you can't use the VCT buying to qualify for WTC. You can use VCT buying to eliminate any remaining income tax liability on the remaining WTC-qualifying income.

You might, say, use pension contributions for your higher rate tax band to get 40% relief then VCT buying to eliminate your remaining basic rate income tax liability.

If your work pension scheme uses salary sacrifice there's another tweak. Income tax is payable on total income but work salary sacrifice switches from higher rate band 2% NI saving to basic rate 12% NI saving based on the work pay, not total taxable income. Since you have non-work income there may be a band where you can receive both higher rate income tax relief and basic rate range NI relief for a total saving of 52% on your pension contributions, plus any employer NI contribution.