Save £700+ in tax by chucking taxable-benefit-money into pension on Monday before end of FY?

RedMonty

So I found that I got paid two years worth of a particular taxable benefit in one financial year. It creates a problem which I might be able to resolve by making a lump sum payment into my pension by this Monday (eek!) before the end of financial year.

This benefit (Carer's Allowance for looking after my disabled kid) is taxable so I declare it on my Self-Assessment form each year. I'm a bit cheesed off, as last year I was under the taxable allowance, and if it had been paid to me on time I wouldn't have needed to pay tax on it. Now because it's been paid late, I have to pay tax on it.

I have options:

• Declare the full £8K of taxable benefit this year and pay tax on the part above the personal allowance. (Will cost me about £700 in tax)

• Declare just the amount I should have been paid this year, £4K, no tax. (But last year I only declared the £1K I actually received in this benefit so this might ring alarm bells?)  EDIT: Apparently I can request that the benefit paid in arrears should go into the appropriate (previous) year's SA return. Still researching how to do this.

• Make an £4K payment into my SIPP pension, which means that I get a 25% pension bonus plus £4k won't get counted as will be deducted from income & save on the tax for Tax Credits purposes, making them go up. Win! I have to do this on Monday so it counts within this financial year.

(EDITED following feedback from MSE guys)

I'm tempted to go for the last solution which benefits me in multiple ways. 

PROBLEM: I don't know if this taxable benefit (Carer's Allowance) counts as 'earnings' for making payments into pension. This is important because if it's not 'earnings' then I can't get the 25% pension bonus. It's only available for pension payments up to 100% of 'earnings' (excludes unearned income, including all untaxed benefits).

My theory is: Carer's Allowance is taxable (in my mind) because I work looking after my disabled kid, hence it should count as 'earnings' for making pension payments. Govt website says it is an 'earnings-replacement' benefit for people who spend at least 35 hours per week caring for someone who has a disability. In other words, if you don't do the work of caring, you don't get Carer's Allowance. That all points to it being eligible as 'earnings'.  But I don't know for sure. I have searched and searched and not been able to find an answer. 

What do you think?  

(I don't have much other qualifying 'earnings' apart from Carer's Allowance. Have already maxed out the £3600 low earner pension contribution allowance. Too old for LISA. Not on UC.)

[Deleted User]

Carers allowance is earned income for tax purposes and unearned income for UC purposes. But how will a payment into your SIPP ‘save on the tax’?

Grumpy_chap

RedMonty said:

I have options:

• Declare just the amount I should have been paid this year, £4K, no tax. (But last year I only declared the £1K I actually received in this benefit so this might ring alarm bells?)

That is not an option as it would mean an incorrect entry on your SA return = fraud.

I struggle to understand how you have £8k of carer's allowance, no other earnings, yet exceed the personal allowance.  Have I missed something?

Dazed_and_C0nfused

Make an £4K payment into my SIPP pension, which means that £4k won't get counted as income & save on the tax plus I get a 25% pension bonus, plus my Tax Credits go up. Win! I have to do this on Monday so it counts within this financial year.

Sorry to burst your bubble but contributing £4k into a SIPP will have absolutely no impact whatsoever on your taxable income.

It would increase your basic rate band by either £5,000 (if you mean you were paying £4k net) or £4,000 (if you mean you were paying £3.2k net).

But you might want to read this.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim76005

[Deleted User]

Dazed_and_C0nfused said:

Make an £4K payment into my SIPP pension, which means that £4k won't get counted as income & save on the tax plus I get a 25% pension bonus, plus my Tax Credits go up. Win! I have to do this on Monday so it counts within this financial year.

Sorry to burst your bubble but contributing £4k into a SIPP will have absolutely no impact whatsoever on your taxable income.

It would increase your basic rate band by either £5,000 (if you mean you were paying £4k net) or £4,000 (if you mean you were paying £3.2k net).

That’s the point that I was making even IF the op paid tax.

K_S

@redmonty From what I can see on the guidance which defines earnings for the purpose of pension tax relief, Carers Allowance does not appear to fall under any of the categories.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

RedMonty

[Deleted User] said:

Carers allowance is earned income for tax purposes and unearned income for UC purposes. But how will a payment into your SIPP ‘save on the tax’?

I worded it poorly - apologies as my mind was full of working out the details of a salary sacrifice plan for a family member (where, yes, pensions contributions are deducted from income. But that doesn't apply in my case. You are correct & I will amend my post.)

If I am over the tax-free allowance for income, then by paying £4K into SIPP, I receive 25% top-up bonus, which will be £1K, cancelling out the £700 in tax plus a bit extra. But I can only do that if Carer's allowance is accepted as 'earnings'.

RedMonty

Grumpy_chap said:

RedMonty said:

I have options:

• Declare just the amount I should have been paid this year, £4K, no tax. (But last year I only declared the £1K I actually received in this benefit so this might ring alarm bells?)

That is not an option as it would mean an incorrect entry on your SA return = fraud.

I struggle to understand how you have £8k of carer's allowance, no other earnings, yet exceed the personal allowance.  Have I missed something?

Agree, will enter the correct amount on my SA. 

I have £8K of carer's allowance, some earned income from side work, and further 'unearned' income from investments I made with savings from my previous job. This is all taxable & exceeds the personal allowance. However the 'unearned income' doesn't count towards how much I can put into my pension & still get 25% tax relief.

Grumpy_chap

RedMonty said:

Agree, will enter the correct amount on my SA. 

I have £8K of carer's allowance, some earned income from side work, and further 'unearned' income from investments I made with savings from my previous job. This is all taxable & exceeds the personal allowance. However the 'unearned income' doesn't count towards how much I can put into my pension & still get 25% tax relief.

Thanks for adding the clarification - it was not obvious (to me) from the OP.

RedMonty

Dazed_and_C0nfused said:

Make an £4K payment into my SIPP pension, which means that £4k won't get counted as income & save on the tax plus I get a 25% pension bonus, plus my Tax Credits go up. Win! I have to do this on Monday so it counts within this financial year.

But you might want to read this.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim76005

Thank you for that link. It says "Arrears of benefit may be paid in a lump sum. The arrears are chargeable for the year or years of assessment to which they relate." 

So I can go back to my 2020-21 SA and update the figure for the amount I received in taxable benefits?  I have just checked online and yes there is a link to amend it in the Gateway / HMRC SA website.  

I am several thousand under the tax-free allowance for that year so it should fit in quite nicely there. I think I am also obliged to inform Tax Credits separately of the new update - it may not carry over automatically. That additional income will reduce my Tax credits but oh well. 

It is annoying that I could have made a £3600 (£2880+tax relief) pension payment for that year (which would have been taken off income for Tax Credits purposes) but did not have the money for it cos that benefit wasn't paid in time. 

(PS I worded the SIPP part wrongly in your quote. Thanks for pointing it out, I have amended my post. The SIPP payment will be taken off my income for Tax Credits purposes, but not my income for Income tax purposes, as you pointed out.) 

RedMonty

K_S said:

@redmonty From what I can see on the guidance which defines earnings for the purpose of pension tax relief, Carers Allowance does not appear to fall under any of the categories.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Thank you for the reference. I was annoyed with it & ended up reading the relevant section 189 of the Finance Act 2004, but it appears you are right. Annoying that a 'work-replacement' benefit does not actually allow one to make similar provisions for their future as one could do with an identical income from work. I guess there are very few people in my situation. So that's settled. 

I found a useful briefing from the House of Commons Library which succinctly lays out the history of Carer's Allowance and what it's intended for (income maintenance, but not a 'payment for work') and the problems it has, and future intentions for it:

https://commonslibrary.parliament.uk/research-briefings/sn00846/