AVC: Can they reduce tax on other income ?

My_perfect_cousin

Hi. I'd really value confirmation of the excellent advice received so far. The reason being that Prudential (the source of the AVCs) are refusing to respond to my questions on the matter. They say that this would be advice rather than facts. I don't agree.

The question is

' If my AVC payments from salary at source reduce my taxable income from salary to a point that is below the higher tax rate threshold, would the 'gap' between the taxable pay post-AVCs and the higher tax threshold be available for savings interest. yes or no?'

I think yes - folks on here think yes... can it be anything other than 'yes'?

The problem is that, without any response from Prudential I can't plan my tax matters and am likely to reduce my AVC contributions as a result.

The response from Prudential (get financial advice / an accountant) has been disappointing.

xylophone

https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

The amount of your Personal Savings Allowance depends on your adjusted net income

https://www.gov.uk/guidance/adjusted-net-income



https://www.pru.co.uk/rz/localgov/avcs/

Your contributions are taken from your pay before tax.


http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0491

https://www.moneymarketing.co.uk/tapering-of-annual-allowance-adjusted-and-threshold-incomes/

Re PSA and "adjusted net income"

http://www.litrg.org.uk/sites/default/files/files/Savings%20and%20dividend%20tax%20FINAL.pdf

whatimeslunch

Found this thread really helpful since I'm in a v similar position to the OP. Thanks to all for sharing information/thoughts.

I'm considering AVCs with prudential too, and a large benefit seems to be that I can 'definitely' move myself down into basic tax payer status by doing so since they will reduce my taxable income (and I'm pretty close to the threshold e.g £2k). Another benefit of AVCs I'm told is that its classed as occupational and if it's taken as a lump sum at the same time as my Local Govt pension is drawn down, depending on a few factors the AVC fund 'may' all be tax free rather than 25% of it (which may be the case in a SIPP). A negative is however the limited number of funds available through prudential, and I fear possible 'layering of fees' where 'funds of funds' are concerned making running costs fairly higher than it first seems.

My understanding is if I put money into a SIPP (after tax) instead, it has the effect of instead increasing tax free allowance, and you have the paper work of claiming back the HR component from HMRC. But..can it have the same outcome of 'resulting' in me being an official basic rate taxpayer rather than HR? The advantage of staying Basic Rate for me is marriage allowance. Any thoughts - am I safer using AVC's rather than a SIPP if having basic rate status is a major goal? Thanks for any guidance.

Dazed_and_confused

Contributions to a SIPP where basic rate tax relief is added by the pension provider do not reduce your taxable income.

They increase the amount of basic rate tax payable which, if you have sufficient income, in turn reduces the amount liable to higher rate tax.

So they can have a similar effect but for totally different reasons.

OldBeanz

If putting the money into a LGPS AVC, you can draw the whole lot as a tax free lump sum. If you invest in a SIPP, you will be able to take 25% tax free and the rest as income, further restricting the amount you can take without incurring higher tax. Any investment with a SIPP would have to perform exceptionally to beat the flexibility.

MK62

OldBeanz wrote: »

If putting the money into a LGPS AVC, you can draw the whole lot as a tax free lump sum..

Though this must still be within the overall 25% tax free amount on the whole pension....it's not an additional tax free lump sum.


Could still be a worthwhile benefit of course.....

whatimeslunch

Appreciate all your replies. Take the point re the AVC only being tax free as a lump sum if it's a max of 25% of the total pot, and altho it still could be an attractive proposition. I'm quite taken by investment trusts via the SIPP re fees / poss overall return but will weigh it up carefully.

I think I'm beginning to get it Dazed & Confused. If I understand it correctly then the SIPP payments could work just as well as AVCs in keeping me out of Higher Rate tax and eligible for Marriage allowance & £1000 interest allowance pa, although as you say for different reasons than AVCs (increasing tax relief & basic rate band rather than reducing taxable pay - I think). I'm probably overthinking this but can I double check that if you pay no Higher rate tax (because of SIPP contributions increasing relief), then that officially means you are a Basic Rate tax payer. To explain I phoned HMRC and one of the advisers seemed to imply that since the SIPP contributions didn't reduce my Taxable pay I was still officially a higher rate payer, but then another advisor said the opposite, so I'm beginning to have more confidence I wouldn't be a HR taxpayer officially! I appreciate it's important to carefully word the question to ensure you're asking the right thing.

Dazed_and_confused

I'm probably overthinking this but can I double check that if you pay no Higher rate tax (because of SIPP contributions increasing relief), then that officially means you are a Basic Rate tax payer.

You would be for Marriage Allowance unless you also had dividend income which would be taxed at higher rate if it wasn't for the dividend allowance tax rate of 0%.

If that is the case then even though no higher rate tax is payable you would lose your entitlement to Marriage Allowance.

whatimeslunch

"You would be for Marriage Allowance unless you also had dividend income which would be taxed at higher rate if it wasn't for the dividend allowance tax rate of 0%."

Thanks again. I understand that the dividend allowance this yr is £2000. From what you say, if I use any of this allowance are you saying I'll be classed as ahigher rate tax payer?

If this is the case can I put a corresponding further amount into the SIPP which would that cancel it out, or does it not work that way?

That's my last question, honest! Thanks