AET for Light Touch £1437 net or gross

michaels

the_pink_panther_2 said:

@alchemist777 @yamor Thanks for that.  Apologies, I'm confused with all the terminology. Re-reading your post, it looks like you're saying (and I'm not totally sure of this) that for pension contributions made by net pay arrangements, the AET is calculated AFTER pension contributions have been made, rather than by using full gross earnings?  Or are you saying that the RTI feed should be picking people's work groups correctly? apologies, I'm not 100% what you are saying but I'm not to savvy with the terminology you're using so that's probably why.

I tracked this down, albeit thanks to @calcotti 's knowledgeable posts from some time back.  I believe it's the relevant legislation relating to AET groups 

ADM Chapter J2: Work Related Groups (publishing.service.gov.uk)

If you scroll to paragraphs J2091 and J2092:

 "Calculating monthly earnings for the purpose of work-related requirements

 J2091 In order to determine a person’s monthly earnings to decide whether work-related requirements apply, a monthly average of their earnings should be used.

J2092 The person’s monthly average should be determined 1. by the amount of the earned income calculated or estimated in relation to the current assessment period before any deduction for 1.1 income tax 1.2 national insurance contributions 1.3 relievable pension contributions1or

 2. where the earned income fluctuates (or is likely to), the amount of that income, calculated or estimated before any deduction for 2.1 income tax 2.2 national insurance contributions 2.3 relievable pension contributions "

Updated 11 Sept 2024 so must be current.

If I Google the term 'relievable pension contribution', I get this:

What does Relievable pension contribution mean?

A contribution paid to a registered pension scheme by or on behalf of a member of that scheme, unless one or more of the following exceptions applies.

A payment is not a relievable contribution if: (1) the member was aged 75 or over when the contribution was made; or (2) the contribution is paid by the member's employer; or (3) the payment is an age-related rebate or a minimum contribution paid by HMRC to a contracted-out pension scheme under the Pension Schemes Act 1993, ss 42A(3), 43 or the corresponding Northern Ireland legislation; or (4) it is a life assurance premium contribution in accordance with the Finance Act 2004, 195A.

So I believe that this means that AET is always based on earnings before any relievable pension contributions, regardless of how they are made (net pay or otherwise). 

Ahh - but are net pay pension contributions 'relievable'?  Basically I think the tax is never charged rather than being taken and then returned as tax 'relief'.  For example with net pay, if pay goes lower than the personal allowance then there is no tax benefit to the pension contribution unlike personal sipp contributions from net pay where 'tax relief' is available on contributions made from personal allowance income even though no tax was actually paid.

the_pink_panther_2

@michaels By my understanding of the Google definition of 'relievable', it is.  I'm not savvy in this sort of terminology so I couldn't swear to it, but I think so.

huckster

The whole idea of AET is to encourage increase in earnings and reduce need for as much UC.  Therefore unsurprising that Government/Parliament have not added any additional lines to legislation to deal with certain types of pension/payroll deductions from the gross pay calculation for AET purposes.

The question raised by this thread is not something UC will answer, as they apply the RTI reported earnings data. If people have a problem with way UC is looking at their specific payroll earnings in relation to AET, they should raise the issue with their local MP.

kaMelo

michaels said:

the_pink_panther_2 said:

@alchemist777 @yamor Thanks for that.  Apologies, I'm confused with all the terminology. Re-reading your post, it looks like you're saying (and I'm not totally sure of this) that for pension contributions made by net pay arrangements, the AET is calculated AFTER pension contributions have been made, rather than by using full gross earnings?  Or are you saying that the RTI feed should be picking people's work groups correctly? apologies, I'm not 100% what you are saying but I'm not to savvy with the terminology you're using so that's probably why.

I tracked this down, albeit thanks to @calcotti 's knowledgeable posts from some time back.  I believe it's the relevant legislation relating to AET groups 

ADM Chapter J2: Work Related Groups (publishing.service.gov.uk)

If you scroll to paragraphs J2091 and J2092:

 "Calculating monthly earnings for the purpose of work-related requirements

 J2091 In order to determine a person’s monthly earnings to decide whether work-related requirements apply, a monthly average of their earnings should be used.

J2092 The person’s monthly average should be determined 1. by the amount of the earned income calculated or estimated in relation to the current assessment period before any deduction for 1.1 income tax 1.2 national insurance contributions 1.3 relievable pension contributions1or

 2. where the earned income fluctuates (or is likely to), the amount of that income, calculated or estimated before any deduction for 2.1 income tax 2.2 national insurance contributions 2.3 relievable pension contributions "

Updated 11 Sept 2024 so must be current.

If I Google the term 'relievable pension contribution', I get this:

What does Relievable pension contribution mean?

A contribution paid to a registered pension scheme by or on behalf of a member of that scheme, unless one or more of the following exceptions applies.

A payment is not a relievable contribution if: (1) the member was aged 75 or over when the contribution was made; or (2) the contribution is paid by the member's employer; or (3) the payment is an age-related rebate or a minimum contribution paid by HMRC to a contracted-out pension scheme under the Pension Schemes Act 1993, ss 42A(3), 43 or the corresponding Northern Ireland legislation; or (4) it is a life assurance premium contribution in accordance with the Finance Act 2004, 195A.

So I believe that this means that AET is always based on earnings before any relievable pension contributions, regardless of how they are made (net pay or otherwise). 

Ahh - but are net pay pension contributions 'relievable'?  Basically I think the tax is never charged rather than being taken and then returned as tax 'relief'.  For example with net pay, if pay goes lower than the personal allowance then there is no tax benefit to the pension contribution unlike personal sipp contributions from net pay where 'tax relief' is available on contributions made from personal allowance income even though no tax was actually paid.

Yes they are, the only difference between net pay and relief at source contributions is how the tax relief is given.

Relief at source, the tax is reclaimed from HMRC. Net pay, the tax relief is included in the contribution and never deducted.

A person ends up in the same position whichever method is used.

the_pink_panther_2

kaMelo said:

For completeness, pension contributions made via salary sacrifice would not count towards any earnings thresholds.as these are not employee contributions..

I was just hoping to pick your brains on this. I was Googling the difference between 'net pay' and 'salary sacrifice', but if I click on the .Gov website, I get that they are the same thing.   so on the one hand if it's net pay, we think that the pay is grossed up, but if it's salary sacrifice, the we think that it's net of the salary sacrifice.   So I'm unsure.  I'm pretty sure I just don't understand how this works, I was juts hoping that you would clarify whether they are or aren't the same thing. 

From this link here:

https://community.hmrc.gov.uk/customerforums/sa/70a91c3f-fdab-ee11-a81c-0022481b1a99#:~:text=With "net pay" (also,a benefit separate from salary.

. With "net pay" (also known as "salary sacrifice"), the value of the pension payments would have been removed from the total taxable pay figures.

the_pink_panther_2

huckster said:

The whole idea of AET is to encourage increase in earnings and reduce need for as much UC.  Therefore unsurprising that Government/Parliament have not added any additional lines to legislation to deal with certain types of pension/payroll deductions from the gross pay calculation for AET purposes.

The question raised by this thread is not something UC will answer, as they apply the RTI reported earnings data. If people have a problem with way UC is looking at their specific payroll earnings in relation to AET, they should raise the issue with their local MP.

But surely the legislation states and dictates for in the situation that  pension contributions made via net pay arrangements, whether the total gross earnings are included or whether they are net of that when calculating whether someone is over or below AET, so if the feed is misinterpreting the information then that can be resolved by going via a mandatory reconsideration rather than to an MP?  The legislation looks clear to me that in the case of any relievable pension contribution, earnings need to be grossed up of that, it's really just a question of defining relivable pension contribution.  Or is there something I'm missing?   

kaMelo

the_pink_panther_2 said:

kaMelo said:

For completeness, pension contributions made via salary sacrifice would not count towards any earnings thresholds.as these are not employee contributions..

I was just hoping to pick your brains on this. I was Googling the difference between 'net pay' and 'salary sacrifice', but if I click on the .Gov website, I get that they are the same thing.   so on the one hand if it's net pay, we think that the pay is grossed up, but if it's salary sacrifice, the we think that it's net of the salary sacrifice.   So I'm unsure.  I'm pretty sure I just don't understand how this works, I was juts hoping that you would clarify whether they are or aren't the same thing. 

From this link here:

https://community.hmrc.gov.uk/customerforums/sa/70a91c3f-fdab-ee11-a81c-0022481b1a99#:~:text=With "net pay" (also,a benefit separate from salary.

. With "net pay" (also known as "salary sacrifice"), the value of the pension payments would have been removed from the total taxable pay figures.

While on the surface they may appear similar they are very different, with different implications for other things too.

Net pay deductions don't reduce your gross earnings, you still receive your contractual pay, tax and NI is the same as relief at source and, should you be lucky enough to be a member of defined benefit pension scheme, the total pensionable pay upon which your pension benefits are calculated, are not reduced.

Any pension contributions made are employee contributions and relievable for tax (subject to the rules)

Compare that to salary sacrifice where you agree to sacrifice part of your salary (sublect to minimum wage rules) in return for your employer paying an equal amount into something like a pension scheme. Your contractual salary is therefore reduced by the amount you sacrifice, you only pay tax and NI on the reduced amount. With regard to a defined benefit pension scheme, the amount of pensionable pay used for calculating your pension benefits is reduced.

Any contributions into a pension scheme via salary sacrifice are employer contributions, they are not relievable contributions as there is no tax relief on employers contributions.

There are many other, usually tax saving, reasons for using salary sacrifice. Employers also benefit as they don't pay employers NI on the amount sacrificed.

For AET purposes:

The gross pay before net pay deductions is the figure UC should use

For salary sacrifice, the gross pay after deducting the amount sacrificed is the figure UC should use.

the_pink_panther_2

@kaMelo Thank you so much, that's really clear and useful. Very much appreciated.

huckster

@the_pink_panther_2

Nobody from UC is going to mess around with HMRC data or override UC work group categories, to remove need for Job Centre appointments relating to what is being discussed in this thread.

UC system will continue to use HMRC RTI data as reported by employers when assessing whether AET met. If the UC system finds AET not met, the Job Centre will book appointments. 

Very little point raising this issue with UC or Job Centre, as I don't think they can do much.  Therefore if people are frustrated by this AET issue, they should ask local MP to raise issue with DWP.

alchemist777

it seems that the problem lies with 'NET pay arrangements pensions'' because pension contributions are removed before tax and NI contributions. If your gross pay is £935 (below the taxable threshold anyway) and the £50 pension contribution is deducted under a 'net pay arrangement', the RTI report shows the figure of £885 (£935-£50). The key point is how the DWP interprets the Administrative Earnings Threshold (AET) earnings.If the pension was removed after tax, the earnings reported would still be £935.

The AET is based on gross taxable earnings as reported by the Real-Time Information (RTI) system. This means that your gross earnings before any tax or National Insurance (NI) contributions are used to assess whether you're above or below the threshold. However, under a net pay arrangement, your pension contribution is deducted before tax, which means your gross taxable earnings are £885 (£935 - £50). This figure is what the RTI reports to the DWP.


This needs to be challenged.