High Income Child Benefit Charge - torn between CS pension and SIPP

Thrifter_2

Afternoon - Hope you are all in the best of spirits for the new year!

Apologies upfront as I was dithering on whether this should be posted in cutting tax or pensions.

I’m in a bit of a pinch right now due to a promotion at work and various bonuses for excellent performance. I’ve spent the best part of today working through my 2023-2024 PAYE payslips to get my head around tax as I fear I may now fall into Higher Tax Income and lose out on child benefit payments.

Background

·         37, male, married, receive £4555 child benefit per year (5 children under 16).

·         Full time employed in Civil Service – only job.

·         On Alpha Pension since introduction.

·         Not purchased Civil Service AVCs

·         Not paid into buying years to retire earlier.  

·         House Paid.

·         Wife is not currently employed.

·         Tax code 1383M

·         Have savings pot of one year income.

I’ve estimated my Taxable pay (net adjusted income) to be £55,819.34

I estimate I will be charged at the end of the Tax year £2,650.67 using an online calculator

Need to confirm:

Question 1)

·         Have I calculated my net adjusted income correctly i.e. it is based on Taxable pay rather than net pay?

Question 2)

·         What is the total amount I need to deposit in Civil Service AVCs scheme if I were to join in Jan 2024 to stay under the £50K threshold for 2023-2024? I understand I am able to change it later.

Question 3)

·         Would depositing in an Civil Service AVCs scheme mean I need to complete a Self Assessment?

Question 3)

·         What is the amount I need to deposit in a SIPP to stay under the £50K if i were to go for this option? I know this will mean I need to complete a Self-assessment.

Financial from payslip data and estimates

Month	Annual Salary	Regular Payment	Irregular Payment	Total Gross Payment per month	Alpha Pension Deductions	Taxable Pay period	Taxable pay to date	Net Payment Amount
Mar-24	£57,722.00	£4,810.17	£0.00	£4,810.17	£353.55	£4,456.62	£55,819.34	£3,374.01
Totals							£55,819.34	£41,792.04

Any help would be eternally appreciated!

Thrifter.

sheramber

How to work out your net adjusted income
https://www.gov.uk/guidance/adjusted-net-income

Universidad

Can depend on a few factors - for me AVCs would have the advantage of the net pay arrangement, which matters because I live in Scotland so the tax bands are different, and claiming tax relief from HMRC is more of a pain than just having it resolved by PAYE.

AFAIK, you don't need to complete a self assessment (or otherwise declare to HMRC) if your adjusted net income is below the threshold. (Unless you need to do that for some other reason already, obviously).

Dazed_and_C0nfused

You appear to have overlooked the loss of Marriage Allowance when calculating the tax due.  That is likely to add £504 to your Self Assessment liability.

1.  Adjusted net income is, for most people, all your taxable income, including interest and dividends taxed at 0% (or any other rate) less any RAS pension contributions and Gift Aid payments.  You cannot deduct net pay pension contributions when calculating your adjusted net income (Alpha are net pay).

2.  Until you have accurately calculated your expected adjusted net income that is impossible to answer.  You also need to know if the extra contributions will be made using the net pay or RAS method.

3.  Why do you think contributing to a SIPP to avoid HICBC would require a tax return?  Liability to HICBC currently requires a return but if you are completely avoiding it what makes a return necessary?  Is there some other criteria you hit?

Also, you are overcomplicating things with all that payslip info, the key factor is your taxable pay (the pay which will be reported on your P60).  That is the starting point for adjusted net income, what happens month by months is irrelevant.

r6mile

With 5 kids it is a total no brainer to stay below 50k - I have 3 so my marginal rate at 50-60k is around 70%, with 5 kids you are at 95%!! Plus marriage allowance which I hope you are claiming…

I use the AVC scheme as it avoids having to reclaim tax relief from HMRC which took ages for me last year so am keen to avoid. This is because your contributions come out of your gross pay - whereas with a SIPP they don’t.

(Remember that bank interest increases your ANI so if you have any outside an ISA I’m afraid it counts.).

Assuming your ANI is going to be around 56k, what you could do is enter the AVC scheme now with a contribution rate of 2k pcm - as there are 3 months of payroll left. And then for next year you adjust the contributions to 500pcm (assuming you expect your ANI to be 56k). 

With the AVC scheme you can make contributions directly to Legal and General but I think these are via the relief at source method so you would need to reclaim tax back from HMRC, so personally I would reserve this for any smaller payments you need to make closer to the end of the FY - ie if you think you will be over the threshold.

Thrifter_2

Dazed_and_C0nfused said:

You appear to have overlooked the loss of Marriage Allowance when calculating the tax due.  That is likely to add £504 to your Self Assessment liability.

1.  Adjusted net income is, for most people, all your taxable income, including interest and dividends taxed at 0% (or any other rate) less any RAS pension contributions and Gift Aid payments.  You cannot deduct net pay pension contributions when calculating your adjusted net income (Alpha are net pay).

2.  Until you have accurately calculated your expected adjusted net income that is impossible to answer.  You also need to know if the extra contributions will be made using the net pay or RAS method.

3.  Why do you think contributing to a SIPP to avoid HICBC would require a tax return?  Liability to HICBC currently requires a return but if you are completely avoiding it what makes a return necessary?  Is there some other criteria you hit?

Also, you are overcomplicating things with all that payslip info, the key factor is your taxable pay (the pay which will be reported on your P60).  That is the starting point for adjusted net income, what happens month by months is irrelevant.

Thanks Dazed_and_C0nfused. You're right, on reflection I think i have been over-complicating things. 

1. My Taxable pay which is presume is ANI on my payslip is determined by the deduction from Alpha.

2. looking at the Cabinet Office AVC member booklet (landg.com) it seems that this is net pay 

3. I wasnt sure if it was needed, but thank you for clarifying.

4. I will call HR and ask them what my estimated taxable pay will be for the 2023-2024 financial year as I have realised that NI contributions are likely to change in Jan 2024.

Thrifter_2

r6mile said:

With 5 kids it is a total no brainer to stay below 50k - I have 3 so my marginal rate at 50-60k is around 70%, with 5 kids you are at 95%!! Plus marriage allowance which I hope you are claiming…

I use the AVC scheme as it avoids having to reclaim tax relief from HMRC which took ages for me last year so am keen to avoid. This is because your contributions come out of your gross pay - whereas with a SIPP they don’t.

(Remember that bank interest increases your ANI so if you have any outside an ISA I’m afraid it counts.).

Assuming your ANI is going to be around 56k, what you could do is enter the AVC scheme now with a contribution rate of 2k pcm - as there are 3 months of payroll left. And then for next year you adjust the contributions to 500pcm (assuming you expect your ANI to be 56k). 

With the AVC scheme you can make contributions directly to Legal and General but I think these are via the relief at source method so you would need to reclaim tax back from HMRC, so personally I would reserve this for any smaller payments you need to make closer to the end of the FY - ie if you think you will be over the threshold.

Thank you r6mile - great advice  I think i may follow suite - good to know i am not the only one in this predicament

Can i ask, do you claim back from the HMRC for your AVC scheme and if so, how is this done?

Thrifter_2
 

hugheskevi

4. I will call HR and ask them what my estimated taxable pay will be for the 2023-2024 financial year as I have realised that NI contributions are likely to change in Jan 2024.

NI contributions and the January change will not affect the calculation of your ANI nor taxable income. I'd be surprised if your HR would be willing (or able) to give you an estimated taxable pay figure for 23/24, but it is trivial to calculate yourself.

Contributions to the AVC scheme are usually made through payroll and the net pay process so there is nothing to claim back from HMRC. It is only if you make a lump sum payment directly to Legal and General that you would need to reclaim tax.

r6mile

As Hugheskevi says - our resident expert on everything Civil Service pensions - pension contributions through payroll via the net pay method (which includes Alpha as well as the AVC scheme) reduce your taxable income (ie what's shown on your P60) so there is nothing to claim back.

So what I am planning to do is get my ANI down to the 50k HICBC threshold via my AVC contributions. If for whatever reason I get to March and it looks like I will be slightly over, I will make a direct payment to L&G to get back down to the threshold. I will have to claim the pension tax relief for this amount - but you can do this after the tax year is finished via your Personal Tax Account on the Gov.UK website.

One thing I would add though - keep in mind that in the longer term there are other ways to reduce your ANI. Gift-aid eligible charitable contributions is an obvious one, but don't forget about things like annual leave purchase scheme (which your department may run), unpaid parental leave (which you have a statutory right to), or the Cycle to Work Scheme. Obviously these don't help your pension pot but worth considering alongside AVCs if they would help you anyway.

PS: once you join the AVC scheme, consider transferring any previous DC pensions into it (if you have any). The charges are pretty low and it has a decent fund selection.

Yorkie1

r6mile said:

With 5 kids it is a total no brainer to stay below 50k - I have 3 so my marginal rate at 50-60k is around 70%, with 5 kids you are at 95%!! Plus marriage allowance which I hope you are claiming…

I use the AVC scheme as it avoids having to reclaim tax relief from HMRC which took ages for me last year so am keen to avoid. This is because your contributions come out of your gross pay - whereas with a SIPP they don’t.

(Remember that bank interest increases your ANI so if you have any outside an ISA I’m afraid it counts.).

Assuming your ANI is going to be around 56k, what you could do is enter the AVC scheme now with a contribution rate of 2k pcm - as there are 3 months of payroll left. And then for next year you adjust the contributions to 500pcm (assuming you expect your ANI to be 56k). 

With the AVC scheme you can make contributions directly to Legal and General but I think these are via the relief at source method so you would need to reclaim tax back from HMRC, so personally I would reserve this for any smaller payments you need to make closer to the end of the FY - ie if you think you will be over the threshold.

Double check with your finance team when the deadline is for having a deduction in January's salary will be.  You'll be into January by the time you submit the application form for the AVCs.

Don't automatically assume that you will be able to contribute during January, in which case you'll need to up the contributions for only 2 months (I am doing the same thing as you, and found a suggestion that you need to let your pay team know of any new / amended changes a month in advance - I emailed the completed form to Pay on about 18 Dec, and they confirmed it would be deducted from January). 

Universidad

r6mile said:

If for whatever reason I get to March and it looks like I will be slightly over, I will make a direct payment to L&G to get back down to the threshold. I will have to claim the pension tax relief for this amount - but you can do this after the tax year is finished via your Personal Tax Account on the Gov.UK website.

That option certainly works, but in case you're not aware the CS AVCs can be changed monthly, rather than annually only in April, which would be the case for, for example, Added Pension or EPA. So you could in theory change the monthly amount of your AVCs in, say Jan or Feb to fine tune your ANI under the 50K mark.

I'm planning to do this with the 43K tax threshold here in Scotland. Occasional semi-mandatory overtime means that I can't exactly predict my pensionable salary for the year, even where the pay agreements are known in advance.

What I do know is that I don't like the idea of losing 42p in the pound to income tax for overtime on a weekend I'd rather be in bed, so I'll be being conservative!