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Could pension contributions count as deprivation of income for working tax credit?
Hi, I have a client who is currently receiving Working Tax Credit. The client is an employee. He wants to put £5,000 a year into his personal pension so that his working tax credit would increase to the maximum tax credit level. Working Tax Credit assessable income is calculated by taking pension contributions away from gross income. There is not a deprivation of capital issue as the client is going to use non-taxable savings to pay for this.
However, could the deprivation of income rule be a problem?
The The Tax Credits (Definition and Calculation of Income) Regulations 2002 regulation 15 states “If a claimant has deprived himself of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, he is treated as having that income”
I think there is an argument that paying into a pension fund is not depriving himself of income as it does not alter his income level and that he is merely spending his income in a different manner.
However, could there be an argument that he is reducing his assessable income?
I understand the deprivation of income rule only applies when the income is deprived for the intention of increasing Working Tax Credit.
The The Tax Credits (Definition and Calculation of Income) Regulations 2002 regulation 15 states “If a claimant has deprived himself of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, he is treated as having that income”
I would like to see how they would arrive at that, deprivation, I’m not a TC expert but you can’t deprive yourself of something you already have.
The The Tax Credits (Definition and Calculation of Income) Regulations 2002 regulation 15 states “If a claimant has deprived himself of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, he is treated as having that income”
I would like to see how they would arrive at that, deprivation, I’m not a TC expert but you can’t deprive yourself of something you already have.
An example would be someone who is self employed paying themselves a low income so that they could claim Working Tax Credit. There would then be more money retained within the business.
[ Edited: 22 Mar 2017 at 04:22 pm by iut044 ]As long as it’s a Personal Pension or Stakeholder Pension that should not be a problem as long as it’s under the prescribed amount (£40k?) far as I can tell. He would best be dealing with an authorised financial adviser to check the law on contributions and allowances.
https://www.gov.uk/tax-on-your-private-pension/annual-allowance
http://www.pruadviser.co.uk/content/nav/about/26674/pghome/49880/52677/52680/52770/
As long as it’s a Personal Pension or Stakeholder Pension that should not be a problem as long as it’s under the prescribed amount (£40k?) far as I can tell. He would best be dealing with an authorised financial adviser to check the law on contributions and allowances.
https://www.gov.uk/tax-on-your-private-pension/annual-allowance
http://www.pruadviser.co.uk/content/nav/about/26674/pghome/49880/52677/52680/52770/
Thanks for your help, John. The client has already spoken to a financial adviser who has said that he can go ahead. However, the financial adviser is not an expert on tax credits. Therefore the client wants advice from me on whether it is possible that the deprivation of income rule would be applied.
All looks OK then.
There can’t be any foreseeable deprivation issue as it’s within the regs.
All looks OK then.
There can’t be any foreseeable deprivation issue as it’s within the regs.
I see what you mean about the regs.
The Tax Credits (Definition and Calculation of Income) Regulations 2002 regulations 3 (7) states:-
In calculating income under this Part there shall be deducted the amount of—
(a)any banking charge or commission payable in converting to sterling a payment of income which is made in a currency other than sterling;
(b)any qualifying donation (within the meaning of section 25 of the Finance Act 1990 (donations to charity by individuals)(22)), made by the claimant or, in the case of a joint claim, by either or both of the claimants; and
(c)any contribution made by the claimant, or in the case of a joint claim, by either or both of the claimants to—
(i)a retirement benefits scheme approved under Chapter 1 of Part 14 of the Taxes Act, including a pilots benefit fund approved under section 607 of that Act(23) and a relevant statutory scheme within the meaning of section 611A of that Act(24);
(ii)a retirement annuity contract approved under Chapter 3 of Part 14 of that Act; or
(iii)a personal pension scheme, approved under Chapter 4 of that Part 14 of that Act.
That the term “any contribution” is used means that the deprivation rules do not apply.
(iii)a personal pension scheme, approved under Chapter 4 of that Part 14 of that Act.
That the term “any contribution” is used means that the deprivation rules do not apply.
I’d agree provided your client’s pension definitely falls under the section of the Act quoted.
This is why I mentioned using a qualified FA.
Just for info:
This is from the (good) old days where the annual allowance was higher - so you can see how some were able to avoid tax thresholds etc. I understand this is (hysterically) historical and no longer applies or has been revised lower in previous budgets/reviews.
“The Government encourages people to save for their retirement and in doing so gives tax relief on contributions paid into registered pension schemes. However, there is a ceiling for tax relief purposes called the annual allowance.
Any contributions that you or your current employer make over this figure will trigger an annual allowance charge and you will be taxed at 40% on the excess.
The annual allowance for the tax year 2007/2008 is set at £225,000 so the majority of people won’t be affected by it. The figure will increase by £10,000 p.a. up to 2010/2011 (£255,000), when it will be reviewed.”
http://www.mycompanypension.co.uk/What-Was-A-Day-Active-Members-DB