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

Thrifter_2

hugheskevi said:

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.

Happy New Year hugheskevi .

Thank you hugheskevi  for clarifying. I'm fairly confident now that I will be donating (most) of the last two months of my salary for this tax year into my Pension to avoid the Higher Tax Threshold.

Whilst browsing the CS pensions website, i have now realised that there is also an option for added pension (AP) into Alpha or the previous option i was exploring via Civil Service Additional Voluntary Contribution Scheme (AVC) in a scheme with L&G.

From first impressions, the AP seems a lot more rigid on fixed payments but will keep matters more tidy as the contribution will be in one scheme and consolidating my Alpha. However, if there are any red flags with AP vs AVC please shout out.  The yearly limit for AP is £8,400 for 2023-2024 and gives me enough flex for the amount i need to reduce down by.

Am i right in assuming that, should i wish to transfer my whole monthly wage into AP, that amount would be £4456 i.e my taxable monthly amount?

The reason i ask, i intend to set up two monthly payments (for Feb 24/March 24) but would be helpful to know how much is available to put in.

Apologies for all the daft questions - like many others i thought with pensions are something i'd worry about when i get near retirement age but finding that i need to crack this a little earlier on in life.

Thrifter_2

r6mile said:

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

Happy New Year r6mile.

Good shout r6mile and some really good tips to draw down ANI! It would be so much easier if this was all based on actual pay after tax. The disparity between ANI and what you get in your pocket can be quite high if you are relatively young and have a family. For example, i will be earning a lot less money this tax year now prior to my promotion but to be tax efficient and to meet system rules, being made to squirrel more away into pensions.

Is there any reason you did not go for an Added Pension or look to buying an EPA (assuming you have not)?


Thrifter_2

hugheskevi

Thrifter_2 said:

Whilst browsing the CS pensions website, i have now realised that there is also an option for added pension (AP) into Alpha or the previous option i was exploring via Civil Service Additional Voluntary Contribution Scheme (AVC) in a scheme with L&G.

From first impressions, the AP seems a lot more rigid on fixed payments but will keep matters more tidy as the contribution will be in one scheme and consolidating my Alpha. However, if there are any red flags with AP vs AVC please shout out.  The yearly limit for AP is £8,400 for 2023-2024 and gives me enough flex for the amount i need to reduce down by.

Am i right in assuming that, should i wish to transfer my whole monthly wage into AP, that amount would be £4456 i.e my taxable monthly amount?

The reason i ask, i intend to set up two monthly payments (for Feb 24/March 24) but would be helpful to know how much is available to put in.

You cannot set up 2 monthly payments into AP - you either pay throughout the full year via monthly contributions (which is set up prior to the scheme year, deadline for next year is 8th March) else you pay by lump sum. You can only make 1 lump sum contribution per year.

The limit on Added Pension relates to the annual amount of Added Pension, not the contribution. To purchase £8,400 of Added Pension would cost somewhere in excess of £100,000 so you have no issues with limits.

It would probably be easiest to make a lump sum purchase by bank transfer of however much your ANI exceeds £50,000. You have until 9th February to do this. You then engage with HMRC to get the tax refund on the entire contribution - which is straightforward in theory but can be very painful in practice due to the ignorance of this type of tax refund amongst HMRC staff. 

Thrifter_2

Yorkie1 said:

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). 

Happy New Year Yorkie1 - that is a really good point and I imagine that schemes are likely to have increased requests given pay increases coupled with fixed tax thresholds, lots will be caught by this fiscal drag. 

r6mile

I went for AVC apposed to added pension or EPA because it is more flexible, and I can vary payments every month as opposed to just once a year. And of course make ad hoc lump sum payments directly to L&G.

My goal is to reduce ANI to just below the HICBC threshold, and with pay awards, in year awards etc it can be very difficult to forecast what my gross salary will be in advance, so an added pension monthly contract wouldn’t work.

I also see value in having a separate DC pot, to complement my DB Alpha pension, again as it can be drawn more flexibly. Of course you could do a mix of the two if you wanted.

PS: Another thing to flag is the Alpha pension contribution thresholds, which jump from 5.45% to 7.35% of your pensionable salary once you hit 56k - and these are remaining frozen in FY 24/25. You say your gross pensionable salary is £57,722. This can be reduced by cycle to work, annual leave purchase, etc. If your salary was say £55,999, then your Alpha contributions would be £3052 pa as it will be at the 5.45% rate, but at your current salary it will be £4243 pa as you are in the 7.35% rate.

So it could be extra beneficial to not only reduce your ANI (via pension contributions etc) to below £50,099, but also your pensionable salary to below £56k, so as to also fall to the lower Alpha contribution threshold. Were you looking to buy a bicycle by any chance??

Thrifter_2

r6mile said:

I went for AVC apposed to added pension or EPA because it is more flexible, and I can vary payments every month as opposed to just once a year. And of course make ad hoc lump sum payments directly to L&G.

My goal is to reduce ANI to just below the HICBC threshold, and with pay awards, in year awards etc it can be very difficult to forecast what my gross salary will be in advance, so an added pension monthly contract wouldn’t work.

I also see value in having a separate DC pot, to complement my DB Alpha pension, again as it can be drawn more flexibly. Of course you could do a mix of the two if you wanted.

PS: Another thing to flag is the Alpha pension contribution thresholds, which jump from 5.45% to 7.35% of your pensionable salary once you hit 56k - and these are remaining frozen in FY 24/25. You say your gross pensionable salary is £57,722. This can be reduced by cycle to work, annual leave purchase, etc. If your salary was say £55,999, then your Alpha contributions would be £3052 pa as it will be at the 5.45% rate, but at your current salary it will be £4243 pa as you are in the 7.35% rate.

So it could be extra beneficial to not only reduce your ANI (via pension contributions etc) to below £50,099, but also your pensionable salary to below £56k, so as to also fall to the lower Alpha contribution threshold. Were you looking to buy a bicycle by any chance??

haha loving your style r6mile!

Unfortunately there's not much available to bring down my Alpha contributions % at the moment but something i would certainty look to explore for the next FY - thank you so much for the heads up. Out of interest, if i did contribute the higher % does it have any positive impact in terms of the pension itself? put another way, why should I be looking to stay on the 5.45% side of things pensions-wise in Alpha scheme? apologies in advance if this is a silly question.

The CS AVCs option is appealing to me a lot more as the Minimum Pension Age for the scheme is currently 55 rising to age 57 from April 2028, therefore I may be able to use this as an option to clear a mortgage if i were to get one in the near future rather than going for the Additional Pension option in Alpha.

Lastly, can i ask if your AVCs show on your monthly payslip also along with your Alpha contributions?

Thifter_2

 

r6mile

The way CS Alpha pension contributions are worked out, the higher contribution rate is a cliff-edge (not a marginal rate, ie you pay the contribution rate on your whole salary). To take the extreme example, someone earning £55,999 will be in the 5.45% band so pay £3,052 in Alpha contributions per annum - if you earn £56,000 the you will pay £4,116 per annum, to effectively build up the same pension.

(Obviously the trade-off is that a lower pensionable salary means you build up less Alpha pension, so if you were on say 60k gross then salary sacrifice to drop below 56k is less of a no-brainer).

So as you are looking to reduce your ANI anyway (to avoid HICBC), finding a way to fall below the threshold (via some sort of salary sacrifice) can make it even more worthwhile, given how close you are to the 56k threshold. One thing to flag though, is that the contribution threshold is determined monthly (not yearly). So in effect it's whether you earn more or less than £4,667 pcm. 

In my case, I am using both AVCs as well as annual leave purchase/unpaid leave to keep my pensionable salary below 4,667pcm (to stay in the 5.45% band for Alpha) as I am also close to the threshold - and I find the extra leave very helpful to cover school holidays etc, - and my ANI below 50k.

To your final question, yes my AVCs show on the monthly payslip just below the Alpha ones.

hugheskevi

r6mile said:

So as you are looking to reduce your ANI anyway (to avoid HICBC), finding a way to fall below the threshold (via some sort of salary sacrifice) can make it even more worthwhile, given how close you are to the 56k threshold. One thing to flag though, is that the contribution threshold is determined monthly (not yearly). So in effect it's whether you earn more or less than £4,667 pcm. 

Just one caution on this - I've found at least one Civil Service department that operates salary sacrifice (in this particular case, for cycle to work scheme) by reducing gross salary, but not pensionable earnings - ie, you get all the benefits of income tax and NI savings, but still pay the same pension contributions and accumulate the same pension.

It is a very generous approach, but does mean it can't be used to reduce member contributions. So be sure to understand exactly how any form of salary sacrifice will be applied in practice.

r6mile

hugheskevi said:

r6mile said:

So as you are looking to reduce your ANI anyway (to avoid HICBC), finding a way to fall below the threshold (via some sort of salary sacrifice) can make it even more worthwhile, given how close you are to the 56k threshold. One thing to flag though, is that the contribution threshold is determined monthly (not yearly). So in effect it's whether you earn more or less than £4,667 pcm. 

Just one caution on this - I've found at least one Civil Service department that operates salary sacrifice (in this particular case, for cycle to work scheme) by reducing gross salary, but not pensionable earnings - ie, you get all the benefits of income tax and NI savings, but still pay the same pension contributions and accumulate the same pension.

It is a very generous approach, but does mean it can't be used to reduce member contributions. So be sure to understand exactly how any form of salary sacrifice will be applied in practice.

That’s interesting! For unpaid leave and annual leave purchase mine definitely operates via salary sacrifice - I assume cycle to work would be similar, but didn’t realise the approach differed in some departments.

PS: I am still wishing for some sort of amendment to HICBC in the budget but not very hopeful. I don’t mind paying 40% tax but it’s the HICBC on top that feels particularly punitive.

Thrifter_2

Update: Thanks for all your support with this. See below my latest pay slip for end of March 24.

 I'm still struggling to see whether i have come under the £50K limit for HICBC?

Am i right that my ANI will be approx £46.1K?

[based on calculation of £59.5K - (£3.8K Alpha) - (£8.9K AVC)]