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Are we over contributing?

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  • Pat38493
    Pat38493 Posts: 3,421 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    edited 24 November 2022 at 11:38PM
    Fortunately, to my knowledge it wasn't widely known about and utilised.
    Pretty sure it has been on every tax credit renewal notice ever issued so every tax credit claimant would have known about it.

    Knowing and understanding can be worlds apart though.
    Hmmm well if I am understanding that correctly, there would be a cut off above which you are going to be sending money to pension that you can’t get out again until you are 55.  You would need a lot of children to make it back up to the same net amount as an 82k salary. 
  • Blimey, don't get me going on renewal notices. And award notices!!

    When Tax Credits was first introduced it was portrayed as some sort of near revolutionary new system to help working people out of poverty, or something like that. In reality it was just a revamp of Family Credit/Working Families Tax Credit and Married Mans Allowance/Children's Tax Credits. This shouldn't be confused with Child Tax Credits which is one of the elements of Tax Credits or New Tax Credits as it was originally called. Married Mans Allowance just meant that married people paid less tax, Children's Tax Credit replaced it and  just changed the criteria from being married to having children.

    In reality one of the major issues was that the WFTC computer system was essentially just a copy of the FC one and was on it's last legs.

    So NTC was introduced and, although there were some winners and losers, entitlements for the vast majority of those on WFTC (low paid with kids) didn't really change that much. The real difference, for somewhere in the region of 6 - 7 million families (those who just benefited from CTC and not WFTC) was that as a family instead of paying about a tenner a week less tax you would pay a tenner more tax and receive a payment of the same amount into your bank. Progress?

    Also what you received was enough paperwork to wallpaper your front room. Each year both of you would receive a renewal notice, an award notice to finalise previous year's entitlement and another award notice to confirm your current year's entitlement. A minimum of 6 letters, all sent with postage paid separately. To be fair this was eventually simplified but not for a good few years. I have memories of the folders I keep with my official documentation bursting at the seams.      
  • zagfles
    zagfles Posts: 21,548 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    edited 25 November 2022 at 12:51AM
    zagfles said:
    Pat38493 said:
    zagfles said:
    Pat38493 said:
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
    "Tax credits" as in Gordon Brown's payable tax credits which are not "credits" of "tax" at all but more like a welfare benefit, although only partially means tested (tested against income but not capital). Being replaced by Universal Credit which is tested against both income and capital, although there is supposedly transitional protection for those being migrated. Not sure how it works for people with savings. Pension contributions are still 100% deductible for UC as far as the income test goes.

    OK - I wasn't aware that you can still be receiving tax credits under that old system when you have a household income of £82K although I admit I don't know much about it.  Is it also based on the number of children you have or suchlike?
    Pension conts are fully deductible so it's income after pension conts that count. So if OP on £70k contributes £40k and OP's wife contributes full salary then combined income is £30k, which is enough to get some tax credits with 2 kids, possibly quite a lot if childcare being claimed, or disability elements etc.
    You get elements for adults and children, per child, although IIRC there'ss a limit of 2 for children born after 2017. See https://www.gov.uk/government/publications/rates-and-allowances-tax-credits-child-benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance

    In my opinion the most outrageous loophole in the history of the benefits system. I like to think that if I had been fortunate enough to take advantage I wouldn't have done as a point of principle. But maybe if I had been in that position I wouldn't have been able to resist. I certainly wouldn't criticise anyone who did.

    As I understand it, although I wasn't anything like senior enough to know, TC was rushed in due to political pressures. Maybe this issue was just not considered or maybe it was and it just wasn't practical in the timescale to avoid it.  Fortunately, to my knowledge it wasn't widely known about and utilised. And it wasn't really people in the OP's position that benefited greatly; it was people on lower salaries with quite a lot of kids who did SS down to minimum wage and therefore received large TC payments. And I always assumed that they didn't have mortgage/rent to pay, or maybe benefited from maintenance being disregarded as income. I am a bit sketchy because when it was explained to me many years ago by a colleague who worked on the legislative team I didn't even know what SS was. 
    Tax credits as we have now were introduced in 2003, but the "outrageous loophole" you refer to wasn't created then, because in 2003 there were very restrictive rules on pension contributions, for instance if you had an occupation pension you couldn't have a personal one as well, and contributions were restricted to around 15% of salary, varying with age and type of pension, and sal sac didn't really exist.
    The change which enabled it was the "A-day" pension changes in 2006 which basically removed almost all limits on pension contributions for almost everyone, with tax relief on 100% of earnings and an annual allowance of £250k.
    Then Gordon introduced a boost even to that massive loophole with his genius attempt to fix one of the major flaws in tax credits (overpayments caused by increases in income/getting a job), by introducing a massive £25k disregard for income increases, but no disregard for income falls, which meant if your assessed income alternated between say £35k and £10k, you'd get assessed on £10k every year! Accountants were even recommending this, IIRC it was effectively 98% relief on pension contibutions for some, and even over 100% in some circumstances!
    The more "outrageous" elements were reduced by the coalition eg by reducing the disregard and introducing an income fall disregard too, plus UC which has capital rules which will kybosh it for most as I guess most making use of the loophole had savings (you wouldn't usually tie up all your income in pensions unless you had saving to fall back on). Although the rollout of UC has been glacial....so there are still people on tax credits...
  • In my opinion the most outrageous loophole in the history of the benefits system. I like to think that if I had been fortunate enough to take advantage I wouldn't have done as a point of principle. But maybe if I had been in that position I wouldn't have been able to resist. I certainly wouldn't criticise anyone who did.
    Seems I have opened up a debate on the system rather than my original question.  It's only this year my salary has risen to the levels it has.  Before that I was only just 40% payer.  As you say difficult to resist when I heard about it on these boards years ago
  • Pat38493
    Pat38493 Posts: 3,421 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    In my opinion the most outrageous loophole in the history of the benefits system. I like to think that if I had been fortunate enough to take advantage I wouldn't have done as a point of principle. But maybe if I had been in that position I wouldn't have been able to resist. I certainly wouldn't criticise anyone who did.
    Seems I have opened up a debate on the system rather than my original question.  It's only this year my salary has risen to the levels it has.  Before that I was only just 40% payer.  As you say difficult to resist when I heard about it on these boards years ago
    Yes, but is seems like the most common advice aside of debates about the system and on is to keep putting as much into your pension as you can afford and then assess the situation when you get closer to the LTA.


  • zagfles said:
    I think as long at you're getting at least 40% effective tax relief (ie including NI, employer NI rebate, and tax credits), the limit you should be concerned about isn't the LTA but breaching the higher rate tax threshold in retirement. Make sure to account for the state pension. Currently the LTA combined with basic rate tax is 40%, so if you're getting more than 40% effective relief then you're up on the game. Obviously tax rates and thresholds could change, and pension money is tied up till you're 55/57.
    For your effective tax relief value, what are you using for the tax credit %.  Simply the % of tax credits I would get on the £20K below HRT?  i.e If we got £1,000 in TC and I deposited £20K, that's a 5% tax relief?  Or should I include missus contribution as well which is necessary to the equation?

  • Pat38493
    Pat38493 Posts: 3,421 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    zagfles said:
    The more "outrageous" elements were reduced by the coalition eg by reducing the disregard and introducing an income fall disregard too, plus UC which has capital rules which will kybosh it for most as I guess most making use of the loophole had savings (you wouldn't usually tie up all your income in pensions unless you had saving to fall back on). Although the rollout of UC has been glacial....so there are still people on tax credits...
    OK - but then just out of interest are pension savings counted as assets for UC purposes or are they still exempt?  If so the same kind of loopholes might apply?
  • zagfles
    zagfles Posts: 21,548 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    zagfles said:
    I think as long at you're getting at least 40% effective tax relief (ie including NI, employer NI rebate, and tax credits), the limit you should be concerned about isn't the LTA but breaching the higher rate tax threshold in retirement. Make sure to account for the state pension. Currently the LTA combined with basic rate tax is 40%, so if you're getting more than 40% effective relief then you're up on the game. Obviously tax rates and thresholds could change, and pension money is tied up till you're 55/57.
    For your effective tax relief value, what are you using for the tax credit %.  Simply the % of tax credits I would get on the £20K below HRT?  i.e If we got £1,000 in TC and I deposited £20K, that's a 5% tax relief?  Or should I include missus contribution as well which is necessary to the equation?

    The effective relief would be a combination for instance you'll have a cut off point at which tax credits taper to zero, which will depend on what elements you're entitled to eg number of children, childcare, disability etc. So if it's say £40k, then between say £20k and £40k the overall effective relief would be TC taper (41%) plus tax (20%) plus NI if sal sac (12%) plus any employer NI saving they share. Plus possibly student loan repayments. But between £40k and £50k the marginal rate is lower as no tax credits taper. So you'd need to work out the overall combined rate. Plus the other thing which will complicate the equation is the income rise/fall disregard, which could move the tax credit zero taper point up or down by £2500 if your assessed income changes wrt to last year.
    You're wife's income going into a SIPP if you can afford it and are happy to tie it up till retirement is a no brainer, as presumably her £12k salary means she's unlikely to trouble the LTA (unless she's going to earn massively more in later years), and she'd possibly have spare PA when retired, so even without the tax credits saving it's worth doing. Assuming she's contributing to a RAS scheme.

  • zagfles
    zagfles Posts: 21,548 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    edited 25 November 2022 at 1:47PM
    Pat38493 said:
    zagfles said:
    The more "outrageous" elements were reduced by the coalition eg by reducing the disregard and introducing an income fall disregard too, plus UC which has capital rules which will kybosh it for most as I guess most making use of the loophole had savings (you wouldn't usually tie up all your income in pensions unless you had saving to fall back on). Although the rollout of UC has been glacial....so there are still people on tax credits...
    OK - but then just out of interest are pension savings counted as assets for UC purposes or are they still exempt?  If so the same kind of loopholes might apply?
    Pensions won't count until state pension age so it's still there, but in reality would anyone with no/low savings put most of their income into a pension? Unless perhaps they're close to the age where they can access it.

  • Pat38493
    Pat38493 Posts: 3,421 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    zagfles said:
    Pat38493 said:
    zagfles said:
    The more "outrageous" elements were reduced by the coalition eg by reducing the disregard and introducing an income fall disregard too, plus UC which has capital rules which will kybosh it for most as I guess most making use of the loophole had savings (you wouldn't usually tie up all your income in pensions unless you had saving to fall back on). Although the rollout of UC has been glacial....so there are still people on tax credits...
    OK - but then just out of interest are pension savings counted as assets for UC purposes or are they still exempt?  If so the same kind of loopholes might apply?
    Pensions won't count until state pension age so it's still there, but in reality would anyone with no/low savings put most of their income into a pension? Unless perhaps they're close to the age where they can access it.

    Well I'm just wondering if there is a partial loophole still - at 55 I could take a much lower paid job and claim UC and leverage large pension savings somehow?
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