I was in receipt of Working Tax Credit as well as a long-term contributor to my personal private pension with Scottish Widows.
These contributions were facilitated through direct debits from my bank account, allowing me to deduct 100 percent of the pension contributions from my annual salary.
After switching to Universal Credit, I asked for an explanation about the treatment of my private pension contributions.
I was informed by the relevant authority that only my wages, taxes, national insurance and company pension are included in the calculation.
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Question: A This is Money reader recently switched to Universal Credit
I was previously assured that switching to Universal Credit would not put me at a disadvantage.
However, the difference in treatment of private pension contributions leads me to seek your advice on this matter. We would greatly appreciate your prompt advice on this matter.
Steve Webb answers: People in receipt of tax relief – whether Working Tax Credit or Universal Credit – have an extra incentive to save for their pension.
This means that the amount paid into your pension can be deducted from your income when your tax credits are worked out.
This usually means that someone who is saving for their pension will get more tax credits than someone who is not paying into their pension on the same salary.
Note that this applies equally to the old ‘Working Tax Credits’ system and the new Universal Credit system.
Anyone on tax relief should make sure that pension contributions have been deducted from the income used to pay the benefit.
It seems to me as if you may have been misinformed about this.
However, there is one complication in all of this that you need to be aware of and which I believe is causing confusion in your case.
As I’ve explained in previous columns, there are two ways people can get tax relief on their pension contributions. There are:
– ‘Relief at the source’ – this is the normal method for personal pensions (such as yours) and is also the method used by the NEST Government Pension Scheme; with the withholding tax method, you pay the pension out of your paycheck and HMRC provides basic tax relief through a payment into your pension fund; for example, if you pay £80 into your take-home pay pension, HMRC will add £20, giving you a total of £100; the amount of £100 is the ‘gross’ pension contribution; taxpayers with a higher rate can state this gross amount in their tax return and claim additional tax credits above the basic rate;
For those paying into a personal pension or other scheme (such as NEST) which uses the ‘relief at source’ method, these contributions should be deducted by the DWP when working out your UC entitlement.
– “Net Pay Arrangement” – this approach is used by many “occupational” pension schemes; in this case the ‘gross’ allowance is deducted from your pay packet before your tax is assessed; this means your contribution goes into your pension with all the tax relief you are entitled to already taken into account and no further claims are needed;
The relevance of all this to your application for tax credits is as follows.
Because you are paying into a personal pension (and because the money goes directly from your bank account into the pension), your provider uses the ‘Relief At Source’ method.
This means that the DWP should deduct from your earnings the actual amount you pay, plus tax relief (£20 for every £80 you contribute). If they refuse to do that, then I think they should be attacked.
If you were in a pension that used a “Net Pay Arrangement”, the earnings figure on your Universal Credit application form should be your gross pay *after* the gross pension contribution has been deducted.
In this arrangement, I suspect that the DWP automatically takes pension contributions into account when working out people’s Universal Credit.
In short, if you have been told that your personal pension contributions cannot be taken into account, this is incorrect and you should appeal this decision.
In case it’s helpful, this official handbook (Chapter H3 ADM: Earned Income – Employment Earnings) makes it very clear that even if pension contributions paid out of ‘net pay’ have already been taken into account, it warns against double counting them set off, it is quite clear that the ‘total forgivable pension contributions’ should be deducted from income for UC purposes.
This will include payments into personal pensions.
Finally, let’s remind the millions of people on Universal Credit, many of whom will also be paying into workplace pensions, that it’s all worth checking out.
For those paying into a personal pension or other scheme (such as NEST) which uses the ‘relief at source’ method, the DWP should deduct these contributions when working out your UC entitlement.