Paying into a pension when receiving tax credits

Billybogle

I'm 57 and a non-taxpayer, as my only personal income is contributory ESA and interest from savings. I was thinking of opening a SIPP to take advantage of the pension tax relief available to non-taxpayers whereby I can pay £2,880 into a pension each year and have it made up to £3,600 by tax relief. I could pay this amount in for 3 or 4 years and then take it out over the next 3 or 4 years, which would help to make the best of my savings until I receive other pensions at aged 65 and 66.
I thought this was a sensible bit of tax and pension planning.

It then occured to me to check if this would affect the tax credits that my partner receives. My understanding is that the fact that I am paying £3,600 gross into a pension would reduce my income by that amount and my partner would receive additional tax credits of something approaching £1500 a year.

So, for a net contribution of about £1400 a year I would have £3,600 paid into my SIPP.

Am I correct with all of this and could HMRC not say that I was deliberately reducing my income in order to gain more tax credits? Are there any rules about this, or are there any limits to the amount you can pay into a pension and still get more tax credits?

What started off as a bit of sensible financial planning is now starting to look like a bit of a tax credits dodge and I'm not sure if I'd be comfortable doing it if all the above is correct.

Alice_Holt

"Could HMRC not say that I was deliberately reducing my income in order to gain more tax credits? Are there any rules about this, or are there any limits to the amount you can pay into a pension and still get more tax credits? "

Apparently not.


This guy seems to have managed to reduce his gross salary for the purpose of both income tax and tax credits calculations by £100k by making pension contributions, and boasts that he then received £6,000 in tax credits!
I'd estimate on a salary of, say, £118,000 he (in effect) received about 4 times more tax credits than he paid income tax!

See - https://forums.moneysavingexpert.com/discussion/5596625

Note that as the annual allowance (for pension contributions) is £40k, he must have used the carry forward rule to make use of the previous three years annual allowance, to achieve his 85% salary sacrifice.
And of course he would have needed substantial liquid savings to augment his diminished take-home income, and meet his annual mortgage / family / living costs.

xylophone

I could pay this amount in for 3 or 4 years and then take it out over the next 3 or 4 years, which would help to make the best of my savings until I receive other pensions at aged 65 and 66.

When you draw down from your pension there may be considerations if you are on means tested benefits at that time.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf