Low Income & Pension Contributions

Hal17

My daughter has just started a part-time job with the Church of England and joined the Church Workers Pension Fund (CWPF) PB2014. This is a cash balance pension scheme where they add a bonus to the cash fund about 2 years after the contributions are made. They also have a management charge of 0.75%. Not ideal but at least she is getting some free money.

The scheme states that if you do not pay income tax you do not get tax relief on your contributions. My daughter was asking if she should pay any AVC into this scheme? I told her definitely NOT!

I am a retired non-earner and know that I can contribute £2,880 to a personal pension and get £720 tax relief.

My daughter earns £8,374 per year. She will contribute £209 and the Church will contribute £460 towards her works pension. This leave a balance of £7,705 to consider towards her starting a new personal pension.

Is she allowed to contribute say £6,000 to a personal pension and get 20% tax relief on this contribution? I have tried to find an answer on-line but am getting confused. Appreciate any thoughts.

AlanP_2

For those who don't earn enough to get above the personal allowance there can't be any tax relief if the employer runs a Net Pay or Salary Sacrifice pension scheme as you have both realised.

I've made that point explicit in case anyone reading this in the future doesn't appreciate why there is no tax relief.

A personal Relief At Source scheme will add 20% tax relief irrespective if whether the contributor iis is a tax payer or not so yes that is the way for your daughter to go.

Total PERSONAL pension contributions including tax relief can't exceed salary so it looks like she can contribute £8175 gross as the employer contribution doesn't count 

xylophone

https://www.gov.uk/government/publications/pensions-relief-relating-to-net-pay-arrangements/relief-relating-to-net-pay-arrangements

What has happened about this I wonder?

TheSpectator

I believe this anomaly has been somewhat rectified from 6 April 2024 and HMRC will make payments direct to employees equal to the tax relief after the end of the tax year.

https://www.gov.uk/government/publications/pensions-relief-relating-to-net-pay-arrangements/relief-relating-to-net-pay-arrangements

molerat

https://www.legislation.gov.uk/ukpga/2004/12/section/193A

So probably around autumn 2025 for a refund for 2024-25.

Hal17

AlanP_2 said:

For those who don't earn enough to get above the personal allowance there can't be any tax relief if the employer runs a Net Pay or Salary Sacrifice pension scheme as you have both realised.

I've made that point explicit in case anyone reading this in the future doesn't appreciate why there is no tax relief.

A personal Relief At Source scheme will add 20% tax relief irrespective if whether the contributor iis is a tax payer or not so yes that is the way for your daughter to go.

Total PERSONAL pension contributions including tax relief can't exceed salary so it looks like she can contribute £8175 gross as the employer contribution doesn't count 

Thanks Alan for your prompt reply and excellent feedback, that is very much appreciated. That now makes perfect sense and thank you for pointing out that the employer contribution doesn't count.

As per the other replies I did see the HMRC statement but it just confused me, so thanks everyone.

Secret2ndAccount

I too understand that this loophole is being closed to the benefit of your daughter. Therefore she should pay into her CofE scheme to the extent that she receives any bonus payment.
If there is a limit to how much the Church will add, she could open a SIPP with lower charges, and pay into that once she has maxed out the bonus. Might or might not consider this worth the trouble.

If your daughter personally contributes £209 she should get a tax rebate of £52.  The Church's contrib doesn't matter in these calculations
Salary  8165
Contrib  209
Tax rebate  52
subtract = 7904
multiply by 0.8 = 6323
Pay 6320 into SIPP
receive 1580 top-up

Contrib 1  209
tax rebate  52
Contrib 2   6320
top-up       1580
Total       8161

The total of the contributions, plus the tax help must be less than the salary. 

Dazed_and_C0nfused

AlanP_2 said:

For those who don't earn enough to get above the personal allowance there can't be any tax relief if the employer runs a Net Pay or Salary Sacrifice pension scheme as you have both realised.

I've made that point explicit in case anyone reading this in the future doesn't appreciate why there is no tax relief.

A personal Relief At Source scheme will add 20% tax relief irrespective if whether the contributor iis is a tax payer or not so yes that is the way for your daughter to go.

Total PERSONAL pension contributions including tax relief can't exceed salary so it looks like she can contribute £8175 gross as the employer contribution doesn't count 

That is no longer the case for net pay contributions.

From the current tax year onwards there is legislation in place so HMRC have to make a payment to the person making the contributions in certain situations. 

It's a little bit more complicated than this I think but essentially if your taxable income (not taxable earnings) + net pay contributions are less than your Personal Allowance you will get a payment from HMRC which is equal to your net pay contributions X basic rate of tax for the country you are resident in (all 20% at the moment).

I think LITRG have published something about this but there's not much on gov.uk yet, though I guess until we get to the end of the tax year there isn't much for HMRC to tell anyone.

Dazed_and_C0nfused

Secret2ndAccount said:

I too understand that this loophole is being closed to the benefit of your daughter. Therefore she should pay into her CofE scheme to the extent that she receives any bonus payment.
If there is a limit to how much the Church will add, she could open a SIPP with lower charges, and pay into that once she has maxed out the bonus. Might or might not consider this worth the trouble.

If your daughter personally contributes £209 she should get a tax rebate of £52.  The Church's contrib doesn't matter in these calculations
Salary  8165
Contrib  209
Tax rebate  52
subtract = 7904
multiply by 0.8 = 6323
Pay 6320 into SIPP
receive 1580 top-up

Contrib 1  209
tax rebate  52
Contrib 2   6320
top-up       1580
Total       8161

The total of the contributions, plus the tax help must be less than the salary. 

Pretty sure that isn't what the legislation says.

She would get £41.80.  Assuming no other taxable income which took her over her Personal Allowance.