Pensions make my head hurt!

wend33

I made the decision back in May that I'd had enough of the job I've been doing forever and I was going to leave, living off my savings until my pension kicks in at 60 (7 years away). So as not to make a decision I might regret I set myself a leaving date of Jan 2023. That time is fast approaching!
Anyway, from May onwards I have been making AVCs via the CSAVCS - Civil Service additional contribution scheme. I also dropped a lump sum into the post but this has not had any pension tax relief applied.
What I need to understand is how much I can add to this pot and I thought I understood that but have had lots of conflicting information so far. These are my simplified figures:
Annual salary is just under £35k but when I leave I will have earned around £28.8k for the year.
AVCs will amount to around £20.8k
Pension contributions to Alpha from pay around £1580
The way I think it works is that I can contribute an amount up to the value of my gross earnings into the pot and be able to get tax relief?
If that's the case I can still have some tax relief back on part of the lump sum I paid in up to roughly £6.4k? So about £1500 back if I complete a self assessment tax return?
I've found the whole thing completely confusing and I know it's my own fault for doing it all last minute!
Any help would be much appreciated.

Linton

You receive tax relief on your pension contributions up to your total gross salary in any one tax year.  Note however that if you pay into a pension with money taken after deduction of tax  the "contribution" is the gross amount ie the amount you pay in plus the tax relief which HMRC add to the pension pot.

I do not know whether CS AVCs are taken before or after deduction of tax but assume it is after.

Dazed_and_C0nfused

wend33 said:

I made the decision back in May that I'd had enough of the job I've been doing forever and I was going to leave, living off my savings until my pension kicks in at 60 (7 years away). So as not to make a decision I might regret I set myself a leaving date of Jan 2023. That time is fast approaching!
Anyway, from May onwards I have been making AVCs via the CSAVCS - Civil Service additional contribution scheme. I also dropped a lump sum into the post but this has not had any pension tax relief applied.
What I need to understand is how much I can add to this pot and I thought I understood that but have had lots of conflicting information so far. These are my simplified figures:
Annual salary is just under £35k but when I leave I will have earned around £28.8k for the year.
AVCs will amount to around £20.8k
Pension contributions to Alpha from pay around £1580
The way I think it works is that I can contribute an amount up to the value of my gross earnings into the pot and be able to get tax relief?
If that's the case I can still have some tax relief back on part of the lump sum I paid in up to roughly £6.4k? So about £1500 back if I complete a self assessment tax return?
I've found the whole thing completely confusing and I know it's my own fault for doing it all last minute!
Any help would be much appreciated.

This type of contribution is notoriously misunderstood.

If you are paying it gross without any tax relief at point of payment i.e. not net pay, relief at source or salary sacrifice then it works like the Personal Allowance.

So any tax relief is limited to the tax you have actually paid.  

If you deducted the one off payment from your P45/P60 taxable pay figure what would be left?

When calculating this remember your salary is irrelevant for tax purposes as your normal contributions will have been paid under the net pay scheme.  For example salary of £35,000 with Alpha contributions could be taxable pay of just £33,092.

wend33

Dazed_and_C0nfused said:

This type of contribution is notoriously misunderstood.

If you are paying it gross without any tax relief at point of payment i.e. not net pay, relief at source or salary sacrifice then it works like the Personal Allowance.

So any tax relief is limited to the tax you have actually paid.  

If you deducted the one off payment from your P45/P60 taxable pay figure what would be left?

When calculating this remember your salary is irrelevant for tax purposes as your normal contributions will have been paid under the net pay scheme.  For example salary of £35,000 with Alpha contributions could be taxable pay of just £33,092.

Sorry, I don't understand!  I really am stupid when it comes to this subject!

Linton

OK having read Dazed_and Confused's replies and looked further into the issue I will try to explain:

There are 2 main ways in which pension contributions can be made and taxed correctly....

1) "Net Pay" which is often used for employer pension schemes.  Here the pension contribution is deducted from your gross salary before tax is calculated and since tax is never charged on the contribution there is no tax refund.  This is how you main pension works.

2) "Relief at Source" normally used for contributions to personal pensions from taxed income though some employer pension schemes use it.  Since tax has already been paid on the contribution there needs to be a tax refund.    You pay your pension provider 80% of the contribution you wish to make.  The remaining 20% is paid by HMRC directly into your pension.  You then can claim higher rate tax relief if appropriate through your tax return.  This is paid to you rather than your pension by HMRC.

One advantage of Relief at Source is that you get the 20% payment even though you may not have paid any tax on the contribution because your income is below your tax allowance.


But in situations like AVCs where steady contributions are taken from your salary and paid into a supplementary pension scheme  there is a 3rd way of handling tax, I dont think it has a standard name so I have called it AVC.

3)  "AVC" : The money is taken gross from your taxable salary but the amount is added to the Tax Allowance when working out the tax due.  The effect is that tax relief on the AVC is accounted for in the calculation of your tax.  It also means that when you pay in £x that means a contribution of £x unlike Relief at Source.

I believe that some employers allow you to make a lump sum contribution to an AVC.  In that case it may be too much hassle to put it through the payroll system and so Relief at Source is used.

The AVC method means that unlike Relief at Source if your income is below your tax allowance you dont get the extra payment.  So if you are trying to put all your income into pensions it may be best to pay down to your tax allowance into your employers pension(s) and then pay the rest yourself into a personal pension.

hara____

wend - 

There are a couple of things you could do to get the most out of the helpful advice from Linton and Dazed_and_Confused:

- on your payslip, I assume you can see both 'pensionable pay' and 'taxable pay' totals for the year so far. If you've been making regular AVCS contributions from your gross pay (Linton's 'net pay' route) then the difference between your 'pensionable pay' and 'taxable pay' will most likely be the total of your AVCS contributions and your Alpha contributions. Though you may have other factors that complicate the calculation, like one-off bonuses etc

- and with the lump-sum payment, I think there may be more than one option available to members. Did you ask your employer to make the payment via payroll or did you make the payment direct to the AVCS provider (L&G?) ?

wend33

hara____ said: 

- and with the lump-sum payment, I think there may be more than one option available to members. Did you ask your employer to make the payment via payroll or did you make the payment direct to the AVCS provider (L&G?) ?

The lump sum I made directly to L&G so it hasn't had any tax relief applied to it as yet, I assume if I was to get any I would have to complete a tax return?

Dazed_and_C0nfused

wend33 said:

hara____ said: 

- and with the lump-sum payment, I think there may be more than one option available to members. Did you ask your employer to make the payment via payroll or did you make the payment direct to the AVCS provider (L&G?) ?

The lump sum I made directly to L&G so it hasn't had any tax relief applied to it as yet, I assume if I was to get any I would have to complete a tax return?

Not normally no.

How much was the lump sum payment?

And how much pay do you think your P45 will show when you've received your final pay in January/February next year?

Linton

If you pay in the money yourself it will go down the "Relief at Source" route - HMRC will automatically add 25% of your payment (corresponding to 20% tax relief)  making a total contribution of 5/4 X your payment.  It is this higher figure you should use when calculating your total pension contributions against earnings. 

Golactico

I can't offer levels of detail and expertise that others have, but my experience may be of some help to you.

I am a civil servant too and have been making regular contributions to the CSAVC scheme, now run by L&G (was Scottish Widows up to a few years ago). A while ago, I had a lump sum that I wanted to pay into my CSAVC account and I duly sent them a cheque for this amount to be added to my account. The amount was added, pound for pound, with no tax relief top up. I was told that I would need to apply for tax relief on this lump sum amount separately to HMRC, which I did. However, it transpired that I had made a stupid error in paying in the lump sum in one go, in a single tax year. In the tax year that it was paid in, I had paid less in tax than the 20% of the lump sum figure that I was expecting back. If I'd just split the lump sum over 2 tax years, I'd have been about £1K better off.

wend33

Dazed_and_C0nfused said:

wend33 said:

hara____ said: 

- and with the lump-sum payment, I think there may be more than one option available to members. Did you ask your employer to make the payment via payroll or did you make the payment direct to the AVCS provider (L&G?) ?

The lump sum I made directly to L&G so it hasn't had any tax relief applied to it as yet, I assume if I was to get any I would have to complete a tax return?

Not normally no.

How much was the lump sum payment?

And how much pay do you think your P45 will show when you've received your final pay in January/February next year?

The lump sum was from a savings account that matured and was £30k so more than I would be able to get tax relief for.  L&G said that any tax relief I might be due was my job to sort, the won't do it for me.
The final amount of salary before any deductions by the end of January should be about £28.8k