Carers allowance pension contribution exceptions

MOON1066

I'm very confused with how much private pension contributions you can class as exempt when applying for the carers allowance. It states when applying for carers allowance you can earn no more than £130 a week! However it states that you can add 50% of your pension contributions to bring it down to the £130.
So here's the thing... am I right in thinking if I earn £200 a week I would have to contribute £150 to a pension fund...two thirds of my wages!! Then the 50% of my pension contribution (£150) is £75. £75 plus the remaining £50 of my wages = £125. Thus allowing me the carers allowance? What a ridiculous exemption. I have to contribute to two thirds of my wages to a pension!!!!  Any clever bods out there, as I'm so confused??

Alice_Holt

Broadly, yes.
So your options are:
i) Continue to earn £200 pw  

ii) Or, you could reduce your hours to bring your earnings into line with the earnings limit of £132 per week, to be eligible to claim carers allowance of £70 a week. Thus giving a total of c.£200 a week.

iii) As you have calculated, make a pension contribution of £150 pw (preferably using the tax relief at source rather than the net pay method).  Thus leaving earnings of £50, and CA of £70 a week - giving a total of £120 a week.  If / when you are over 55 you could draw-down those pension contributions (note pension rules around MPAA, etc), as pension income does not count towards the CA earnings limit.    

p00hsticks

Alice_Holt said:

iii) As you have calculated, make a pension contribution of £150 pw (preferably using the tax relief at source rather than the net pay method).  Thus leaving earnings of £50, 

I'm not sure that making such a large pension contribution would be allowed if it would take the OP's hourly rate below minimum wage (I think the topic has come up on the Pensions board before now).   

Alice_Holt

p00hsticks said:

Alice_Holt said:

iii) As you have calculated, make a pension contribution of £150 pw (preferably using the tax relief at source rather than the net pay method).  Thus leaving earnings of £50, 

I'm not sure that making such a large pension contribution would be allowed if it would take the OP's hourly rate below minimum wage (I think the topic has come up on the Pensions board before now).   

       The limits on pension contributions are:

    "You can pay as much as you like into your pot, but there are limits to how much tax relief you can receive. If you’re under 75, you’re eligible to pay in up to 100% of your UK taxable earnings or £3,600 gross (whichever is higher) and receive tax relief on your contributions. The value of the tax relief depends on your individual circumstances.

The annual allowance is the maximum you can pay into all of your pension plans combined before a tax charge applies. For 2022/2023 tax year, the annual allowance is £40,000.

The maximum contribution could be in the form of regular payments, one-off lump sum or a combination of both. The limit includes your personal contributions, tax relief and any contributions that are paid by your employer."

 https://thepeoplespension.co.uk/help/knowledgebase/whats-the-maximum-amount-i-can-pay-into-my-pension-pot/

 https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance

Contributions of £150 pw would attract £37.50 pw of tax relief, so £9,750 per year funding the OP's pension account. 

However, if the OP did want to draw down their pension fund to supplement their wages and CA, they would need to look carefully at the MPAA rules as this would limit pensions contributions (and therefore the 50% CA pension exemption).

NedS

p00hsticks said:

Alice_Holt said:

iii) As you have calculated, make a pension contribution of £150 pw (preferably using the tax relief at source rather than the net pay method).  Thus leaving earnings of £50, 

I'm not sure that making such a large pension contribution would be allowed if it would take the OP's hourly rate below minimum wage (I think the topic has come up on the Pensions board before now).   

The minimum wage condition only applies if pension contributions are done through salary sacrifice, and then they are employer contributions not employee contributions. When contributing by net pay arrangements or relief at source, up to 100% of earnings can be paid into a pension (also subject to the annual allowance limit of £40,000 which clearly wouldn't apply here), and 50% of any contributions can be deducted for the purposes of Carers Allowance.

An advantage of doing it through salary sacrifice is that earnings for carers allowance are reduced by the full 100% so the OP could salary sacrifice £70/week bringing their weekly salary down to £130 (so long as they remain above minimum wage) and still qualify for carers allowance . Does the employer offer salary sacrifice and would you remain above minimum wage earning £130/week?