AVC top up

AndyMCFC

Hi,
I am new to this forum and bit clueless with pensions so please bear with me!
I am in a company DB scheme which has now closed but also contribute regular monthly payments into the company DC scheme 7% employer contributions and 7% employee.
I often go into the higher tax bracket towards the end of the year so was wondering would I be better to pay big lump sums into the scheme at the end of the year so I get tax relief at the higher rate and put more cash into my pot?
Hope this makes sense:)

dunstonh

Your title says AVC top up. Yet you dont mention the AVC in your post. Just the DC scheme. AVC is a product type. Do you mean you want to pay in more?

I often go into the higher tax bracket towards the end of the year so was wondering would I be better to pay big lump sums into the scheme at the end of the year so I get tax relief at the higher rate and put more cash into my pot?

The tax year is a total over the tax year. So, it doesn't matter if its in month 1 or 12. Although if your income is variable, you may want to wait until you know your position first.

AndyMCFC

Yes I am paying monthly AVCs.

I was wondering if I wanted to pay an additional lump sum in now I would get tax relief at the basic rate 20% but if I waited till end of year when I usually go into the higher rate 40% would that put more into my pot?
I’m note sure how the higher rate of taxation works (my income is variable) so at the start of the year does my salary get taxed at 20% until my cumulative salary eventually goes over the £46k threshold at the end of the year and only then goes to 40% rate?

Dazed_and_confused

Tax is based on your average earnings based on the total (taxable) income at each pay day.

For example end of April (month 1 of the tax year) your taxable wage is £3,000 so that equates to an annual income of £36,000 so you would pay no higher rate tax (assuming standard tax code).

End May another £3,000 so still earning £36,000/year so no higher rate tax.

End June you get a bonus of £3,500 in addition to your normal wages of £3,000. So total wages after three months of the year is £12,500. This is equal to £50k/year so you pay a little bit of higher rate tax.

End July you are back to just £3,000. Total pay after 4 months of the tax year is £15,500 which is £46,500 so you would pay a tiny bit of higher rate tax (assuming you aren't Scottish resident for tax purposes).

End August another £3,000 means total wages after five months is £18,500 which is £44,400 annually and so no higher rate tax payable.

If you get tax relief at source from the AVC company then you need to tell HMRC what you think your pay will be this (tax) year along with details of the pension contributions. They can then adjust your tax code to make sure you receive any higher rate tax relief during the year via your wages. This tax benefit comes to you via lower tax deductions from your salary because you have a higher tax code, it is never paid into your pension fund by HMRC

dunstonh

Yes I am paying monthly AVCs.

Its worth looking at the AVC as most AVCs are pretty obsolete nowadays. In 2006, the Govt abolished the requirement for employers to offer an AVC. Many withdrew their AVC but some maintained them and you effectively have a 2005 priced product which has had little or no updates since then.

In the meantime retail pensions have become cheaper and cheaper and offered more investment choice and can comply with the 2015 pension freedom changes (unlike most AVCs).

There are some caveats to that. A very small number of AVCs are linked to the main scheme in a way that allows the tax free lump sum to be taken wholly from the AVC. That can be very beneficial. An even smaller number of AVCs have employer matched contributions. But without those, chances are the AVC is a bit out-of date and you should look at individual personal pensions instead.

I was wondering if I wanted to pay an additional lump sum in now I would get tax relief at the basic rate 20% but if I waited till end of year when I usually go into the higher rate 40% would that put more into my pot?

The end result is the same as the tax year is a year. Not a month by month. However, if you pay into the AVC via your payslip, the tax relief could be variable over the months if your income is variable. It will come right automatically by March though.

Individual personal pensions work differently by collecting basic rate relief at source and then you reclaim the higher rate relief via self-assessment. You can do this during the year but most wait until the tax return is received and do it using that.

So, again, a slight difference between an AVC and an individual personal pension.

AndyMCFC

Thanks for making things a little clearer !