LGPS AVCs to reduce tax

redblueplanet

Wasn't sure whether to put this in pensions or cutting tax, but here goes...

I am a 50:50 shareholder/director of our family ltd company as well as having a part-time employed job in a school. My husband and I both take dividends and he also takes a minimal salary. We aim to keep under the £50k income each pa to minimise income tax and to retain child benefit. The only problem is that as my employed salary has increased, this is reducing the amount we can both take as dividends i.e. my salary is £20k so I can only take up to £30k dividends. This means we can only withdraw £30k (plus the min salary) for him.

I am wondering if starting to pay AVCs (standard, not shared cost AVCs) alongside my WY LGPS pension would effectively reduce my income when I complete my self-assessment return enabling us both to take bigger dividends? Have asked our accountant and they were useless so any advice would be gratefully received...

Dazed_and_C0nfused

redblueplanet said:

Wasn't sure whether to put this in pensions or cutting tax, but here goes...

I am a 50:50 shareholder/director of our family ltd company as well as having a part-time employed job in a school. My husband and I both take dividends and he also takes a minimal salary. We aim to keep under the £50k income each pa to minimise income tax and to retain child benefit. The only problem is that as my employed salary has increased, this is reducing the amount we can both take as dividends i.e. my salary is £20k so I can only take up to £30k dividends. This means we can only withdraw £30k (plus the min salary) for him.

I am wondering if starting to pay AVCs (standard, not shared cost AVCs) alongside my WY LGPS pension would effectively reduce my income when I complete my self-assessment return enabling us both to take bigger dividends? Have asked our accountant and they were useless so any advice would be gratefully received...

It would only reduce your taxable income if the contribution was made using the "net pay" method.  Or you sacrificed income in return for an employer contribution to the AVC (not always an option).

If it is made using RAS (relief at source) then it doesn't reduce your taxable income but it will increase your basic rate band (useful for avoiding 40% tax) and also reduces your adjusted net income (useful for reducing HICBC).

So it should help but you would be best understanding the method before doing anything else.

redblueplanet

Thanks so much. I need to double check but don't think it would be salary sacrifice. So effectively, if it was RAS it wouldn't reduce my taxable income but would still do what I needed it to in terms of staying on basic tax band and avoiding HICBC? 

I've learned loads from reading this forum, but still got a lot to learn...

Dazed_and_C0nfused

redblueplanet said:

Thanks so much. I need to double check but don't think it would be salary sacrifice. So effectively, if it was RAS it wouldn't reduce my taxable income but would still do what I needed it to in terms of staying on basic tax band and avoiding HICBC? 

I've learned loads from reading this forum, but still got a lot to learn...

Yes, ultimately it achieves the same outcome, just in a slightly different way.

With net pay you don't need to do anything, then contributions simply reduce your taxable earnings and you get the maximum benefit immediately.

With RAS you get the basic rate tax relief added to your pension fund but need to notify HMRC so any higher rate tax relief can be given.

Durban

I pay into the LGPS and have been paying into the linked Prudential AVC for 10 years.  Mine uses the " net pay method" not salary sacrifice and I pay reduced tax but the normal NI contribution.

This tax year I have just upped my contribution by alot and the reason for this was to keep my salary under the higher tax bracket due to the sale of a BTL.


I very much doubt it will be RAS if it is the linked AVC to LGPS.  It is a fantastic way to keep your pay at a lower level and when you come to retirement , you should be able to draw the whole of the AVC tax free.  Tax free on the way in and tax free on the way out subject to certain requirements being met.  There are alot of threads on here about how the tax free lump sum works with the LGPS linked AVC's 

redblueplanet

That's really helpful, thanks. Yes, it's that Prudential one. I did a bit more research and it does look to be net pay method rather than RAS. Really appreciate your POV as someone who has done this.

OldBeanz

My wife is currently paying all her LGPS salary (less NI; LGPS contributions; and 1p per month to generate a pay slip) into her AVCs.

Marcon

redblueplanet said:

Wasn't sure whether to put this in pensions or cutting tax, but here goes...

I am a 50:50 shareholder/director of our family ltd company as well as having a part-time employed job in a school. My husband and I both take dividends and he also takes a minimal salary. We aim to keep under the £50k income each pa to minimise income tax and to retain child benefit. The only problem is that as my employed salary has increased, this is reducing the amount we can both take as dividends i.e. my salary is £20k so I can only take up to £30k dividends. This means we can only withdraw £30k (plus the min salary) for him.

I am wondering if starting to pay AVCs (standard, not shared cost AVCs) alongside my WY LGPS pension would effectively reduce my income when I complete my self-assessment return enabling us both to take bigger dividends? Have asked our accountant and they were useless so any advice would be gratefully received...

Rather than paying into an AVC, would another possibility be an employer contribution from your family limited company to a personal pension of your own choice, assuming you don't have an auto-enrolment scheme sitting patiently waiting for someone to join it? The company would get corporation tax relief and the pension contribution wouldn't count towards your income. In return for that, you would get a smaller dividend. That might be totally unsuitable depending on your cashflow needs and your age, but seemed worth mentioning if your accountant was 'useless' on the matter!

redblueplanet

Yes, that definitely is an option we will be considering, thanks. At the moment the issue is more about being able to take money out of the company while being as tax efficient as possible, because as 50:50 shareholders we both have to take dividends of the same size and my external salary is much greater than the one he draws from the company.

Marcon

redblueplanet said:

Yes, that definitely is an option we will be considering, thanks. At the moment the issue is more about being able to take money out of the company while being as tax efficient as possible, because as 50:50 shareholders we both have to take dividends of the same size and my external salary is much greater than the one he draws from the company.

You can always change your respective shareholdings and/or create an extra class of shares (very common to do that, especially if the 'B' class shares have no voting rights). It's straightforward to do and will give you more flexibility in terms of taking dividends of different amounts from the company if that's your goal.

redblueplanet

Really useful info,thanks!