The way this works varies, but effectively, if you’re a higher-rate taxpayer, it costs you £600 ‘net’ for every £1000 going into your pension. That’s a much better deal than basic-rate taxpayers for whom it costs £800 net for every £1000.
FTA: Pensions and tax – two things that sound tricky for many people to understand easily. How can we simplify them in layman's terms?
SC: The simple message is that if you are over the higher-rate threshold, you get more tax relief on pension contributions.
So, if you are already a higher-rate taxpayer, or if you find that the freeze on thresholds means you become one in future years, it might be worth considering paying more into your pension and getting higher-rate tax relief while you still can.
There can be additional benefits in doing so for those in receipt of child benefit.
FTA: Should people getting a pay rise be using AVCs if their scheme allows it?
SC: I’m not sure I would use the term AVCs rather than just ‘additional contributions’. AVC is a term which is used under trust-based schemes – paying voluntary contributions on top of the scheme’s regular contributions which are a condition of scheme membership.
Some trust-based defined contribution schemes may operate separate AVC sections under the scheme. With others, it might go into the same pot (like group personal pension schemes).
It’s unusual for an employer or a provider of a personal pension to limit pension contributions other than the annual allowance [currently £40,000 this tax year]. If your employer will match additional contributions, then the benefits of increasing are doubled again.
FTA: Are there downsides to AVC or 'additional contributions'? They seem quite easy to work out in terms of calculating the cost as a percentage of salary per month.
SC: Some schemes or employers might be less flexible than others – eg only allowing you to change your contributions once a year, such as during the flexible benefits window.
This is normally related to employers trying to manage payroll issues. So a downside would be if the scheme is inflexible and doesn’t allow you to change your contributions quickly.
Another downside would be if changes have to be made using paper instead of online. Employers will have payroll cut-off dates for making changes. Some may take longer than others to make the changes. It depends on the payroll provider capability.
FTA: Do you think there might be more tax devil-in-the-detail come March 23 (the so-called tax day)?
SC: Tax day is supposed to be about tax administration, launching detailed consultations on that. But there’s also the potential for other less ‘admin’ consultations to be launched, for example on capital gains tax reform.
