Salary Sacrifice - Tax Credits and Housing Benefit

wegle

Apologies if this has been asked before, I've had a quick search through and can't find the exact answer I'm looking for.

I recently attended a pensions seminar at work, with particular focus on AVCs. There is a scheme available to us here where we would be able to Salary Sacrifice up to a maximum of £40,000 a year (as long as you don't go below nmw) into an AVC pot for retirement. We would continue to pay our usual pension contributions based on our notional salary (that before salary sacrifice).

I'm currently in receipt of Tax Credits and a small amount of housing benefit so before committing I wanted to run the numbers to see how much, even if only £10 a month, I could afford to put in. I presumed as it was a salary sacrifice, my income for the purposes of tax credits and housing benefit would be lower, so I used the appropriate figures for after the salary sacrifice had been taken.

I was surprised to find that as I increased the SS my amount of TCs and HB increased by practically the same amount. I was messing around with £10, £20, £50 a month figures. So for pure curiosity sake I ran the scenario of if I salary sacrificed to take myself to just above NMW. This would be a sacrifice of £800 a month. I was shocked to see that if I did this my benefits would increase so much that I would only actually take a £50 hit to the actual cash I have in my pocket from all sources.

At this point I was 100% sure I'd completely misunderstood how these things work so contacted HMRC and the local council to ask them. HMRC confirmed my income for their purposes would be the lower amount after the sacrifice had been made. The local council weren't sure and had to do some checking but came back to me today with "I can confirm that if the AVC is ignored for Tax by HMRC then we will ignore this as well. If this is the case and by sacrificing part of your salary your income would reduce then your housing benefit will increase."

Since that I've run some more scenarios and it seems that I could sacrifice £350 a month of my salary into this scheme and have exactly the same amount of money in my pocket as I do now.

So firstly I need to know if I'm really missing something here, have I got this completely wrong. If it is true there is a pretty big moral dilemma here for me. I want to try to save for my retirement and I would have been happy just putting £20 a month in, because I could easily trim my budget for that, but it seems I could be seriously contributing to this whilst not feeling any financial pressure myself but of course contributing to the problem of putting pressure on an already stretched and strained benefits system.

Anyway if anyone has any further info on this or wants to weigh in at all. I'm not looking to start any arguments or anything but advice and counsel is always welcome.

tboo

It's seems better for you to do it this way rather than a general pension deduction but for HB purposes any salary sacrifice is added back onto your net pay, then as it's a pension it's taken off again at a 50% deduction for income.

skcollobcat10

Question answered

tboo

I assume so but it's not often seen.

wegle

tboo wrote: »

It's seems better for you to do it this way rather than a general pension deduction but for HB purposes any salary sacrifice is added back onto your net pay, then as it's a pension it's taken off again at a 50% deduction for income.

This would make more sense to me, but does contradict what the Housing Benefit team have told me. I think what I will do is set it up for the £20 a was going to do and see exactly how they recalculate everything. At least then I'll be in possession of the exact calculation so can run my own numbers of different scenarios. If I did the salary sacrifice I would continue paying my regular pension contributions but these would detailed separately on my wage slip.

wegle

skcollobcat10 wrote: »

So does that mean the more of your wages you put towards a pension,housing benefit and tax credits increase so you don't loose out financially?

If it works like that (which is what I'm trying to work out for sure), it seems in my current position I could sacrifice £350 per month of my salary and not lose out financially at all. Too good to be true is my gut reaction.