Additional Voluntary Contributions

worto03

Hi - My salary has crept into the higher tax bracket, I believe one of the things I can do is make AVC's to my pension but I've had a look at my works pension doc and it says 

* If you want to pay Additional Voluntary Contributions (AVCs) into the ****** 2013 Plan, you can do so direct from your pay. At present AVCs are not within this salary sacrifice arrangement  

Does this mean it won't help get me back into the lower tax bracket?  I thought the salary sacrifice but was the bit that meant it was taken from my wages before the tax calculation?

Thanks for any help.

Dazed_and_C0nfused

You don't contribute to a pension with salary sacrifice, your employer does which means there is no pension tax relief due - the tax (and NI) saving is from you not having the salary to have to pay tax on in the first place.

I think you mean "net pay" which is quite similar to salary sacrifice but you make the contribution.  This works by reducing your taxable income (but the amount on which NI is due).  For example salary £24,000 and AVC paid under net pay of £1,000 = taxable pay of £23,000 (the amount shown on your P60).

worto03

Hi Thanks for the reply,

Brill, yes it's likely me getting terms confused, I'm not good with them, so if I earn just above the bracket and started getting taxed 40% which is what I have noticed has happened this year setting up some AVC's will be the way to get it back down (I know I only pay tax on the bit I earn over the bracket but my pension needs a boost anyway, I started it quite late) and I don't need to worry about that sentence I quoted from our policy? - is that correct?

So AVC's will definitely reduce my taxable income - yes?

Thanks.

Dazed_and_C0nfused

If they are paid under a "net pay" method yes.

The beauty of net pay is that you get the maximum possible tax benefit by having your taxable income reduced, there is no "pension" tax relief as such so you never tell HMRC about it as your lower taxable pay does all the work 

The other option is "relief at source" contributions.  These do not reduce your taxable pay but do increase your basic rate tax band so a similar benefit overall.  For example if you contribute £800 to a relief at source scheme then the pension company adds basic rate tax relief of £200 giving you a fund of £1,000.  You tell HMRC about the gross contribution of £1,000 and they increase your basic rate tax band from £37,500 to £38,500.  So if you are paying enough higher rate tax this saves you £200 in personal income tax (an extra £1,000 taxed at 20% rather than 40%).

worto03

Brilliant, thanks for all the help! Pretty sure I've got it now