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Forum Home  →  Discussion  →  Universal credit administration  →  Thread

Limits on Pension Contributions

scarboroughcab
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Welfare Benefits, Scarborough CAB

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Total Posts: 26

Joined: 30 October 2013

Could someone point out where I’m going wrong here:

55(5)(a) of the UC Regs states that “any relievable pension contributions made by the person in that period” will be deducted from client’s net earned income amount.

It was my understanding that ‘relievable’ here means you can get tax relief on it - is that not the case?

Because if it is the case, then couldn’t I put all my earnings into a pension pot each month and claim UC, even if I’m earning say £50,000 per year?

I know that can’t be right.

Regs: http://www.legislation.gov.uk/uksi/2013/376/regulation/55

Gareth Morgan
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CEO, Ferret, Cardiff

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Bit of a can of worms here possibly.  You can get tax relief on private pension contributions up to the whole of your annual earnings (if you claim more then you have to pay it back) ... but ... the actual way it works may differ.  It may be added on to the amount paid by the pension scheme, it may be done by the employer adjusting tax or you may pay it gross and have to claim it back or adjust the tax code.  That means that sometimes it’s difficult to work out the relevant amount.  If you’re paying tax at the 40% or 45% rate then you have to do it via self-assessment.  Even if you don’t pay any tax, because your income’s too low, you can get some relief where the pension scheme adds it on (a bit of a freebie).

There are limits though where contributions are high, over £40,000 a year, and,now, there are complexities where you take money out of a pension pot and also pay money in. (this is a cunning wheeze if you can afford it).  There are also lifetime limits on contributions; currently £1.25 million.

In practical terms the main group likely to have a benefits/tax issue with the amount of pension contributions may be self-employed people where pension contributions could be used to offset the Universal Credit MIF and cash flow basis, in particular where there are very variable net incomes in different Universal Credit periods.

 

scarboroughcab
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Welfare Benefits, Scarborough CAB

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Total Posts: 26

Joined: 30 October 2013

Thanks Gareth,

I had looked into the tax implications briefly, but nice to have it explained properly (even though it’s still complicated).

Maybe the 50k income is a bit extreme. Imagine a client earning 12k per year, and 10k of this is going into pension contributions. Is there nothing stopping them claiming UC while doing this? Seems strange, but the only thing I can think of is the deprivation of earnings reg.

Gareth Morgan
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CEO, Ferret, Cardiff

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Total Posts: 1995

Joined: 16 June 2010

Nothing at all to stop them and, in the absence of a limit, no deprivation argument.  Pension contributions are a really important area that advisers miss too often.  In Universal Credit, for example, it will be entirely possible for a high pension contribution to reduce net income to a level below the cap threshold and have someone’s benefit reduced!  Conversely, of course, by reducing the amount paid in someone could avoid being capped..