Civil Service Added pension Q&A

hugheskevi

pathsofdarkness said:

My thinking was I could purchase Alpha Added Pension by doing one of the following options:

1. Pay directly from my salary £12k net (£15k gross) over the course of a year by monthly contribution, or 
2. Pay directly from my current account £12k as a single lump sum payment and then reclaim £3k from the HMRC which I think gets added on top of my contribution to take it up to £15k.

The benefit of option 2, I think, is that my payslip won't show a monthly contribution when I make my mortgage application.

As Dazed and C0nfused says, you pay the money to MyCSP, then in a completely separate transaction you contact HMRC to get the basic rate relief due returned to you (not the provider) in cash. Do not confuse this with Relief at Source contributions, where you pay the net amount to the provider who then reclaims the basic rate relief due and adds that to the pension.

pathsofdarkness said:

hugheskevi said:

Given the freezing of income tax thresholds, would you not be better to wait until you are a higher rate taxpayer before making the purchase?

Sorry I don't really understand? I think this is where my knowledge falls apart and fear this is something to do with "fiscal drag" which I think is where I really get out of my depth.

Do mean not paying my intended contribution until a future year when my full contribution would be eligible for the 40% tax relief (or some majority of it)? 

By the end of 2023/24 I'll have accrued £6,800 of Alpha Added Pension (this does not include cost of living increases) and so can purchase another £2,200 more before I hit the £9k limit. I was thinking of closing that gap in the next 3 years before moving to EPA-3.

Indeed, fiscal drag. Your current taxable income appears to be £48,211 before any bonus or other taxable income beyond salary - so only about £2,000 short of the higher rate tax threshold

Assuming that tax thresholds remain frozen in cash terms until 2028, you will probably be a higher rate taxpayer very soon, and certainly will be if you get any reasonable size bonus. Plus promotion would push you well into the higher rate tax bracket.

As a basic rate taxpayer, you would purchase £15,000 of Added Pension, send that amount to MyCSP, and then reclaim £3,000 from HMRC. If you were earning £65,270 or more, you would purchase the same £15,000 and then reclaim £6,000 from HMRC (plus additional Child Benefit, if you have / will have children). If your income is in higher rate bracket but below £65,270 then some but not all of the contribution would be eligible for higher rate relief.

Remember the Added Pension limit increases each year by CPI (rounded to nearest £100) and does not include cost of living increases, just the sum of the cash amounts of Added Pension pension purchased in past years.

You should ensure that you purchase EPA-3 before you hit the Added Pension cap (just before is fine, just so long as you are not at the cap). Be careful that MyCSP probably won't warn you that you are reaching the cap, and may well accept contributions once you have reached the cap before realising at some point that you have exceeded the cap -  I suggest you proactively contact them for more details as you calculate you are approaching the cap.

Dazed_and_C0nfused

pathsofdarkness said:

Dazed_and_C0nfused said:
You have misunderstood the tax benefits of making such a contribution.

As a basic rate taxpayer contributing £12,000 will only save you £2,400 (based on your taxable income being ~£50k).

Any tax relief comes back to you, it has no impact whatsoever on the amount of your pension contribution.

Thank you, that's really good to know! I didn't realise HMRC return the relief amount to the individual rather than putting it into the pension itself. So as a lump sum contribution from my current account I would have to pay £15k but then HMRC would eventually return £3k back to me.

For this type of (fairly uncommon) contribution yes.

If your income ever changes remember that the tax relief on this specific type of contribution is limited to your normal tax liability.  

So if you were only earning say £14k and paying £300 in tax you could only get a refund of £300.

The reason you would get £3k is because the £15k gross contribution is effectively reducing your taxable income from ~£50k to £35k.

This is totally different to a RAS (relief at source) contribution where there is no direct link to the tax you pay.

pathsofdarkness

hugheskevi said:

As Dazed and C0nfused says, you pay the money to MyCSP, then in a completely separate transaction you contact HMRC to get the basic rate relief due returned to you (not the provider) in cash. Do not confuse this with Relief at Source contributions, where you pay the net amount to the provider who then reclaims the basic rate relief due and adds that to the pension.

pathsofdarkness said:

hugheskevi said:

Given the freezing of income tax thresholds, would you not be better to wait until you are a higher rate taxpayer before making the purchase?

Sorry I don't really understand? I think this is where my knowledge falls apart and fear this is something to do with "fiscal drag" which I think is where I really get out of my depth.

Do mean not paying my intended contribution until a future year when my full contribution would be eligible for the 40% tax relief (or some majority of it)? 

By the end of 2023/24 I'll have accrued £6,800 of Alpha Added Pension (this does not include cost of living increases) and so can purchase another £2,200 more before I hit the £9k limit. I was thinking of closing that gap in the next 3 years before moving to EPA-3.

Indeed, fiscal drag. Your current taxable income appears to be £48,211 before any bonus or other taxable income beyond salary - so only about £2,000 short of the higher rate tax threshold

Assuming that tax thresholds remain frozen in cash terms until 2028, you will probably be a higher rate taxpayer very soon, and certainly will be if you get any reasonable size bonus. Plus promotion would push you well into the higher rate tax bracket.

As a basic rate taxpayer, you would purchase £15,000 of Added Pension, send that amount to MyCSP, and then reclaim £3,000 from HMRC. If you were earning £65,270 or more, you would purchase the same £15,000 and then reclaim £6,000 from HMRC (plus additional Child Benefit, if you have / will have children). If your income is in higher rate bracket but below £65,270 then some but not all of the contribution would be eligible for higher rate relief.

Remember the Added Pension limit increases each year by CPI (rounded to nearest £100) and does not include cost of living increases, just the sum of the cash amounts of Added Pension pension purchased in past years.

You should ensure that you purchase EPA-3 before you hit the Added Pension cap (just before is fine, just so long as you are not at the cap). Be careful that MyCSP probably won't warn you that you are reaching the cap, and may well accept contributions once you have reached the cap before realising at some point that you have exceeded the cap -  I suggest you proactively contact them for more details as you calculate you are approaching the cap.

Thank you, that's really useful information. I actually didn't realise that I'm currently only ~£2k below the higher rate threshold (once my main Alpha pension contributions are taken into account) until I saw the £48k figure in your post -- in my head I thought it was a much larger gap but clearly not!

I'm only an SEO and don't see myself ever getting promoted (and at the grand old age of 42 I think I may have missed the boat to ever have children), so depending on pay rises it'll be only a few years at most before I become a higher rate tax payer, will need to think about that i.e. defer buying the majority of Added Pension until it's more tax efficient.

Ultimate plan is to buy almost the max of Added Pension and then switch to EPA-3. I ask MyCSP for annual updates to keep track of where I am (the £6.8k I mentioned earlier excludes cost of living increases, the actual figure with those increases is >£7k but I understand it's the former value which matters in terms of the £9k limit).

Thanks again!

michaels

Note the conversation above re added pension contributions becoming devalued from next April so perhaps better to contribute more this FY if you can.

There was a suggestion that 'tax relief' would become available for all pension contributions from next year, even for relief at source where due to income no tax was actually payable but not that relevant to your income levels.

Although there is a max added pension total, this has been increased and might be again and even if you do fill this you could contribute AVCS to the CS DC scheme or a sipp to stay below the higher rate threshold if desired.

pathsofdarkness

michaels said:

Note the conversation above re added pension contributions becoming devalued from next April so perhaps better to contribute more this FY if you can.

There was a suggestion that 'tax relief' would become available for all pension contributions from next year, even for relief at source where due to income no tax was actually payable but not that relevant to your income levels.

Although there is a max added pension total, this has been increased and might be again and even if you do fill this you could contribute AVCS to the CS DC scheme or a sipp to stay below the higher rate threshold if desired.

Yes, I made an Alpha Added Pension £3.2k lump sum payment from my salary last month (oddly resulting in me paying a negative income tax which scared me a bit but I think that was just HMRC thinking my income had changed significantly and will be put right again this month).


I'll be restarting my CSAVC soon when National Insurance drops by 2 percentage points so I don't get used to having that money available (the aim of this pension pot will be to either retire early or if I want more money, to fund my lifestyle whilst I defer taking my DB pension, though I doubt I'll need to do that latter).

I'm mostly risk adverse and never had a pension until I joined the Civil Service in 2015, and it was really this forum that made me start thinking I should think about my income as a pensioner a bit more closely (though my friends think i'm silly for doing this, which I might be but I just want to make sure I have a good retirement).

hugheskevi

pathsofdarkness said:

I made an Alpha Added Pension £3.2k lump sum payment from my salary last month (oddly resulting in me paying a negative income tax which scared me a bit but I think that was just HMRC thinking my income had changed significantly and will be put right again this month).


etirement).

It doesn't have anything to do with HMRC making any assumptions about your income.

HMRC operates PAYE by giving you 1/12 of your Personal Allowance and each income tax threshold each month, and it operates on a cumulative basis throughout the year (ie imagine a column of taxable earnings, a column of 1/12 of Personal Allowance, a column of 1/12 of Basic Rate band, etc), so that in the final month all of your allowances and thresholds are applied to your total income.

In your case, 1/12 of your Personal Allowance is (£12,570 / 12) = £1,047.50. 
Your taxable income for the month of October was £413.59
Presumably in all previous months you had used up your Personal Allowance and were not a higher-rate taxpayer in those months.
Hence there was £1,047.50 - £413.59 = £633.91 of unused Personal Allowance in October which becomes available to reduce the basic rate of tax paid in the previous months due to the cumulative nature of the calculation. In this case, that reduction of income tax is £633.91 x 20% = £126.78

So as at the end of October, with the income tax refund, you have paid the correct amount of income tax given your cumulative taxable earnings for the year to date.

If you didn't have any further taxable earnings for the year but remained with your employer (eg unpaid leave), you would get a tax refund in each month until April, such that as at the end of April you would have paid the correct amount of tax given your taxable earnings for the year, even though they would all have been earnt in the period April - October.

pathsofdarkness

hugheskevi said:

It doesn't have anything to do with HMRC making any assumptions about your income.

HMRC operates PAYE by giving you 1/12 of your Personal Allowance and each income tax threshold each month, and it operates on a cumulative basis throughout the year (ie imagine a column of taxable earnings, a column of 1/12 of Personal Allowance, a column of 1/12 of Basic Rate band, etc), so that in the final month all of your allowances and thresholds are applied to your total income.

In your case, 1/12 of your Personal Allowance is (£12,570 / 12) = £1,047.50. 
Your taxable income for the month of October was £413.59
Presumably in all previous months you had used up your Personal Allowance and were not a higher-rate taxpayer in those months.
Hence there was £1,047.50 - £413.59 = £633.91 of unused Personal Allowance in October which becomes available to reduce the basic rate of tax paid in the previous months due to the cumulative nature of the calculation. In this case, that reduction of income tax is £633.91 x 20% = £126.78

So as at the end of October, with the income tax refund, you have paid the correct amount of income tax given your cumulative taxable earnings for the year to date.

If you didn't have any further taxable earnings for the year but remained with your employer (eg unpaid leave), you would get a tax refund in each month until April, such that as at the end of April you would have paid the correct amount of tax given your taxable earnings for the year, even though they would all have been earnt in the period April - October.

hugheskevi, I had no idea that was how it works but your explanation makes complete sense to me, how lucky are we to have you on this forum!