SW - AVC taken from salary at end of 22/23 only appears in DC in 23/24 - Help!

Moodyboffin

Good Morning

I screened the forum to find an answer to the below with no luck, so here is the situation:

My employer closed our DB scheme last year so we moved to a DC scheme with Scottish Widows (SalSac) at the beginning of the 22/23 tax year. 

In March’23, I directed some of my bonus into AVCs from a tax efficiency perspective.

When I looked at the total contributions into my DC pension for 22/23, I noticed a discrepancy between my number and SW’s: mine is based on my payslips (i.e. contribution out on the 26th of each month), whilst SW’s seems to be based on when they invest the money, the 20th of the following month). This poses me an issue as it would appear that my last month’s contribution and AVCs taken from my March’23 salary only hit my DC on 27/04/23 ie. the following tax year, not 22/23 as intended.

I appreciate there will be a lag between the contribution showing on the payslip and the time it hits the DC, however interestingly when I look at my OH’s DC with L&G, conveniently the last payment taken from her 27/03/23 payslip was brought forward to 04/04 ie. right at the end of the 22/23 tax year, not a month later as usual, i.e. they seem to sync both to avoid tax year discrepancies.

Few questions:

1. What does it mean from an HMRC perspective? My last month’s contribution and AVCs have been SalSac as shown on my P60, however isn’t there a discrepancy in their books from an Annual Allowance perspective? Does it mean that AVCs will always show in Y+1 with SW?

2. It is something I can challenge with SW or is it the case that some providers can do that? I naively assumed that it would work the same way as L&G as per above, so my tax planning went wrong. Had I known, I would have managed my AVCs differently.

I will call SW tomorrow but wanted to hear back from those who might have come across this before. This would give me some pointer as to how to best handle the conversation.

Thank you

Dazed_and_C0nfused

Salary sacrifice means you haven't contributed to the pension so no pension tax relief is due.

Salary sacrifice means you agree to a reduced salary and in return your employer makes additional pension contributions.  You are not entitled to any tax relief on employer contributions.

we moved to a DC scheme with Scottish Widows (SalSac) at the beginning of the 22/23 tax year. 

In March’23, I directed some of my bonus into AVCs from a tax efficiency perspective.

Is your only concern the amount of annual allowance used?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053200

kinger101

It's quite normal for a pension payment made by salary sacrifice into a DC scheme to hit the pension scheme in the following month.  I'm also with SW, and even though I'm paid on the last working day of each month, the pension contribution doesn't show up until some time between the 14th and 16th of the following month.  Which means it creates  a timing difference between tax years (which can sometimes be exploited for tax minimization).

For you, it means;

(a) Your annual earnings for the tax year 2022/2023 will still reflect the fact that you sacrificed £X from you March 2023 salary.  It makes no difference to 2023/2024 either, as salary sacrificed pay is money you never received.

(b) The pension contribution would have been made on the 20th April 2023, i.e. in the 2023/2024 tax year.  It would only be an issue if you've potentially lost some carry-forward you had intended to use, or it gets factored in when tapering of your pension annual allowance.  Which might be the case if you wanted to contribute more the £60K into your pension this year, or you have total income around £250K.

SW are not going to change the date they received the funds, as HMRC rules state they pension contribution is made on the date it was received by the scheme, not your pay date.  And they've acted correctly.  It's likely all other pension contributions will have a similar (potentially slightly shorter if it was a on-off admin issue) lag, and you can expect March 2024's salary sacrificed pension contribution to arrive in April 2024. 

In summary;

Time lag between pay date and pension contribution arriving is normal.
Your 2022/2023 earnings are still reduced by the amount sacrificed from March's pay
The pension contribution was made in 2023/2024
For the vast majority of people, it makes no difference.  

Moodyboffin

@Dazed_and_Confused and @kinger101 - very clear, thank you.

Thanks in particular for pointing to the HMRC rules, I somehow didn’t come across them before, so I will have to recut my numbers ahead of self-assessment so that I get it right.

Earnings reduction was the right call, however this has an impact on my 22/23 Annual Allowance which now becomes tapered. I will have to move from the Mandatory Pay Scheme to the Voluntary Pay Scheme to cover my AA access and recut the numbers as well. Conversely, those AVCs will now be a matter for 23/24 were the Annual Allowance has gone up to £60k, so it may be to my advantage.

So it looks like going forward I will have to make a call on potential AVCs in Y1 to reduce earnings whilst taking into consideration the impact on AA for Y2, and decide what is the best path forward.

Thanks again for your help!