96% tax relief on pensions

Seems to work for those with kids that can get tax credits, what about those of us on low income with no kids who dont qualify for WTC or any kind of help.

Leigh

WTC is payable for those on low income. Though I understand the hours requirements are a little different.

Martin <

I and others i know are just other the limit, we know this bbecause we applied, so we have to live week to week with no spare cash to invest in a pension.

Leigh

In any definition of low income, or level of credit, there will always be some over the limit. Even while still on what can be considered low income. If its any consolation, those below the upper limit often also have no spare cash to invest in a pension.

Still, I daresay we could all do with an extra 400 a month to stick in a pension for the next 35 years to get a decent pension at the end.

Martin <

You get a personal allowance per person that your salary supports (usually, unless you have a partner who is out of work).

If we had a decent tax system like most civilised countries we wouldn't need these daft tax credits.

On the contrary...

If you qualify for the WTC in terms of hours, age etc, but are just above the limit income wise, then the above method of pension contributions should work for you too.

By making the pension contribution you push your assessed income below the limit and can achieve the same tax relief on the difference between your new lower income and the limit (you'll only get 22% tax relief on the difference between your original income and the limit - but that won't be much if you're "just" over the limit).

The lower your income the less you could contribute and get the 96% relief - if your income goes below approx 7000 then you'll only get 84% as you're out of the basic rate band. Don't take it below 5220 as that's the maximum tax credits threshold.

You can work out your own personal limit by adding up the elements of WTC/CTC you are entitled to (don't include the family element of the CTC), dividing by

0.37 and adding 5220. The elements for next year are here:

d_pbr05_press02.cfm Although don't be surprised if the govt introduce more changes to the tax credits system again in the main budget in March, which could stop this sort of thing....

It's not available for under-25s with no children or disabilities. For

25+ I think it's 30 hours.

The old Earnings-Top up scheme, which was a trial that ran for childless singles and couples in the late 90s, and which was the forerunner to this part of the WTC was far more generous - the lower age limit was 18 and with a 16 hour qualification.

Robbie

What is a decent tax system? We have effectively a 4 tier tax system for income tax (no tax, 10%, 22% and 40%). Though a lot of those receiving tax credits don't pay anything like as much income tax out. Certainly tax credits could be improved. Not so sure about other taxation methods (apart from road tax and fuel tax that could be amalgamated).

Martin <

I thought the incremental tax system went like:

22%, IT = 10%, NI = 11% 33%, IT = 22%, NI = 11% 70%, IT = 22%, NI = 11%, WTC reduction of 37% 33%, IT = 22%, NI = 11% 41%, IT = 40%, NI = 1%

or something more like that.

10+11 is 21, not 22. And for many people NI is only 8%, but otherwise OK.

OK.

Not OK. You can't count TC withdrawal unless you also count TC itself earlier on in the sequence.

Didn't someone say the TC reduction band extends into the HRTP bracket, making for a 78% rate?

The NI drop doesn't kick in at the exact same moment as the IT boost, so depending on circumstances' details, there is a narrow band of either 22%+1% or 40%+11%.

Nope. It's far more regressive than that, especially for families. It goes something like this for a typical family (ranges are approximate and depend on circumstances):

10-4600: 100% - JSA withdrawal 4600-7000: 85% to 88% - HB/CTB withdrawal, (+ some of IT, NI, TC withdrawal) 7000-12000: 95.5% - IT(basic rate), NI, TC withdrawal, HB/CTB withdrawal 12000-20000: 89.5% - IT(basic rate), NI, TC withdrawal, HB withdrawal 20000-25500: 70% - IT, NI, TC withdrawal 25500-32800: 33% - IT, NI 32800-37300: 23% - IT, NI(above LEL) 37300+ : 41% - IT(higher rate), NI(above LEL)

There will be a couple of very narrow negative bands as WTC and the 30 hour element of WTC kick in.

So in general, tax rates drop as income increases.

CTC starts at 0. WTC starts at 16 hours and increases at 30 hours - so you end up with a couple of very narrow very negative bands.

Not usually. It can do for big families or families with disabilites or childcare costs.

If it were usual I'd have entitled the post "114% tax relief on pensions"

Thanks for that.

A lot of people don't like to see withdrawal of a benefit as a tax.

However if you're looking at incentivising people to work the effective incremental tax equivalent situation is a far better marker and illustrates what used to be called the poverty trap.

What astounds me more than anything else is the number of agencies and civil servants who deal with all this very inter-related finances. It would be so much easier for a single agency to do a single calculation in the same way PAYE is calculated. It can't be beyond the wit of man!

In message , Andy Pandy writes

Employee earned income for tax credit purposes is gross not net. So in your example the earnings used in the calculation would be those before the pension contribution, not after. [SI 2002 No. 2006 The Tax Credits (Definition and Calculation of Income) Regulations reg 4 etc]

Clive

Yes, but it also says that contributions to pension schemes are deducted from the claimant's total income.

Or are you saying the "income increase disregard" (of 2,500 this year, 25,000 next year) only applies to employment income?

The tax credits guide suggest consulting your P60 to determine your income last year - the income quoted on P60's is *net* of any company pension scheme contribution *and* AVC's.

In message , Andy Pandy writes

Yes - you are quite right. In a typically convoluted fashion the exception for pension contributions is defined prior to the definition of employee income (at reg 3(7)) and I overlooked this.

There is a fairly standard "voluntary deprivation" provision (at reg 15) but I doubt HMRC could rely on that to stop the sort of clever manoeuvre you suggest.

Clive

Especially the govt, 100% tax on the poor? But taking money off people by reducing benefits has exactly the same effect as taking money off people by taxing them.

Still is, and has been made much bigger in recent years.

It would be easy technically but impossible politically. Logically it makes no difference whether you reduce someone's benefits as their income increases or simply just tax them on their income. But then it would become apparant to everyone what a regressive system we've got.

Some benefits are not the same as wages, just top-ups. Other benefits can be paid in addition to wages, sometimes only for a period, other times indefinately.

Doesn't seem to be an attractive workable solution around though. Minimum wage has been tried, though has its own drawbacks.

Though taxation tends to be less than a simple benefit reduction. Earn 100 a week gross, taxation overall is pretty low. Earn more and taxation increases, though not increasing by the same amounts as the earnings increase. Earn 200 gross, tax increase isn't massive. Even a jump to 300 gross isn't a large jump in taxes.

But then it

Taxation is both a means of revenue for the government and a control on the economy. Its not too bad, allows people a decent standard of living and allows them to earn more while not increasing the tax burden too much.

Martin <