I have received Working Tax Credit whilst simultaneously contributing to my personal private pension with Scottish Widows over an extended period.
These contributions were made possible via direct debit from my bank account, which allowed me to deduct 100 percent of the pension contributions from my annual salary.
Following my switch to Universal Credit, I requested clarification on the treatment of my private pension contributions.
I have been told by the competent authority that only my wages, tax, national insurance and company pension will be counted in the assessment.
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Q: A This is Money reader recently switched to Universal Credit
I was previously assured that moving to Universal Credit would not put me at a disadvantage.
However, the inequality in the treatment of private pension contributions prompts me to seek your advice on this matter. Your prompt advice on this matter will be greatly appreciated.
Steve Webb replies: People with tax credits – whether it’s Working Tax Credit or Universal Credit – have an extra incentive to save into a pension.
This means that the amount paid into your pension can be deducted from your income when calculating your tax credits.
This usually means that someone who saves for a pension receives more tax credits than someone with the same salary who does not pay into a pension.
Note that this applies to both the old Working Tax Credits system and the new Universal Credit system.
Anyone with tax credits must ensure that pension contributions have been deducted from the income used to calculate their benefits.
It seems to me that you have been given incorrect information about this.
However, there is one complication to all this that you should be aware of, and which I think is causing the confusion in your case.
As I have explained in previous columns, there are two ways people can get tax relief on their pension contributions. There are:
– ‘Help at the source’ – this is the normal method for personal pensions (such as yours) and is also the method used by the government’s NEST pension scheme; with the withholding method you pay the pension from your net salary and HMRC provides tax relief at the basic rate through a payment to your pension fund; For example, if you pay £80 into pension from your take-home pay, 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 report this gross amount in their tax return and claim additional tax relief above the basic rate;
For those who contribute to a personal pension or other scheme (such as NEST) that uses the ‘aid at source’ method, these contributions must be deducted by DWP when calculating your UC entitlement.
– ‘Net salary scheme’ – this is the approach used by many ‘occupational pension schemes’; in this case the ‘gross’ contribution will be deducted from your pay package before your tax is calculated; this means that your contribution will be included in your pension, where all tax benefits you are entitled to have already been taken into account and no further claims are required;
The relevance of all this to your tax credit claim is as follows.
Because you contribute to a personal pension (and because the money goes directly from your bank account to the pension), your provider uses the ‘Relief At The Source’ method.
This means that DWP must deduct the actual amount you pay plus the tax credit (£20 for every £80 you contribute) from your income. If they refuse to do this, I think they should be challenged.
If you had a pension that used the ‘Net Pay Scheme’, the income figure on your Universal Credit application form should be your gross pay *after* the gross pension contribution has been deducted.
I suspect that under this scheme, DWP automatically takes pension contributions into account when calculating people’s Universal Credit.
In short, if you are told that your personal pension contributions cannot be taken into account, this is incorrect and you should appeal this decision.
In case it’s useful, this official guide (ADM Chapter H3: Earned Income – Employment Wages) makes it very clear that although pension contributions paid under ‘net pay’ schemes will already have been taken into account, it warns that these be counted twice. it is perfectly clear that ‘total recoverable pension contributions’ should be deducted from income for UC purposes.
This also includes payments to personal pensions.
Finally, a reminder to the millions of people on Universal Credit, many of whom will also be paying into a workplace pension, that this is all worth looking at.
For those who contribute to a personal pension or other scheme (such as NEST) that uses the ‘source aid’ method, these contributions must be deducted by DWP when calculating your UC entitlement.