AVC: Can they reduce tax on other income ?

My_perfect_cousin

Does this sound correct?

The tax benefit from AVCs contributions direct from monthly salary is 40% for the aspect of a salary that is within the upper pay band. The benefit would be 20% for any salary reductions / investments that are within the normal tax band.

If I take out a (Prudential) AVC direct from my monthly salary it could reduce my annual total taxable salary income (after AVC contributions) down into a lower income tax band (eg from the 40% band down into the 20% band).

As an example, if I was to make AVC contributions that reduced my annual salary to £40,000, would this create a 'space' of £5000 worth of 20% tax for other income that I may have in the tax year - such as rental income or interest from savings?

This is largely academic as I doubt that I would have such extra income, but I would be interested to know whether this is correct or not? many thanks

Dazed_and_confused

If you mean for example,

Salary £45000
AVC £4500
Taxable pay £40500

Then yes, it would be the same as how a lot of defined benefit, contribution or CARE schemes work (unless you live in Scotland).

You could still have the £500 or £1000 savings allowance and dividend allowance tax bands as well (income taxed at 0%) and making such contributions could in theory make the difference between getting £500 or £1000 interest taxed at 0%.

jamesd

Yes. It's even better for salary sacrifice schemes because you end up saving basic rate range NI calculated for each pay period and higher rate income tax calculated over the whole year.

My_perfect_cousin

thanks. Just so that I understand...

using the helpful example from D&C

salary of £45000
AVC of £4500
taxable pay = £40500

savings interest of £4000
total taxable pay = £44500

= basic rate taxpayer therefore reduces taxable savings income by £1000

= taxable income of £43500 and nothing in higher tax bracket

is this correct?

Dazed_and_confused

No.

Nothing will reduce the amount of savings income which has to be taxed.

If the figures are for this year, 2017:18, then you have £44500 taxable income which is taxed as,

£11,500 - no tax due to personal allowance
£29,000 x 20% (basic rate on wages)
£1,000 x 0% (personal savings allowance rate)
£3,000 x 20% (basic rate on savings)

If you live in Scotland ignore all of the above.

My_perfect_cousin

Dazed_and_confused wrote: »

No.

Nothing will reduce the amount of savings income which has to be taxed.

If the figures are for this year, 2017:18, then you have £44500 taxable income which is taxed as,

£11,500 - no tax due to personal allowance
£29,000 x 20% (basic rate on wages)
£1,000 x 0% (personal savings allowance rate)
£3,000 x 20% (basic rate on savings)

If you live in Scotland ignore all of the above.

thanks again - that was what I was trying to say. The AVC would enable the savings interest to be at basic rate and thereby resulting in £1000 being untaxed.

Dazed_and_confused

and thereby resulting in £1000 being untaxed

No, it is still taxed, just at a rate of 0%. In your scenario it makes no difference but to some it will make a big difference elsewhere when calculating their tax bill. For example older married pensioners could lose £500 of their allowances by having that £1000 income, still taxed at 0% but it will cost them in another part of the calculation

jamesd

What the AVCs do is increase your basic rate band by the gross AVC amount. That leads to you paying basic rate on more of your income and never getting to the point where you have reduced personal savings allowance.

Dazed_and_confused

Not in this case. From the op's original post (and subsequent replies) I think he is making contributions before tax which I know Prudential definitely do (at least for Teachers if not everyone) so it has similar effect overall but is maybe simpler to follow providing you understand it's taxable pay not salary which is important and you would just the standard basic rate band.

jamesd

Yes, if it's coming out of gross pay there's no need to increase the basic rate band since the lower pay takes care of everything.

My_perfect_cousin

thanks again.

The AVCs come from my monthly (Local Government) salary by Prudential. As such the monthly salary reduces at source.

As I had hoped, it seems that if my net pay (after AVCs) plus interest is £45000 or less, I will be taxed at the basic rate. It also seems that the 0% tax band for my savings interest will therefore apply to the first £1000 or interest (as I will be a basic rate tax payer).

From your excellent advice / comments etc, it seems that the key to the above (especially the benefit of 0% tax of first £1000 interest) is to plan my total AVCs so that my total net income does not exceed £45000.

For others who may be interested in this thread - I am aware of (at least some) of the other AVC considerations. As I understand it, the maximum annual pension contribution limits and lifetime limits are also important when planning total AVC pension. I haven't mentioned this previously as it isn't my query just now.