Tax Relief on AVC

[Hawkey99]

Hi All,

I pay into a AVC so with regards to tax relief how does this work on £100.

Would it mean I actually pay in 67p and the gov pays the rest or does it mean I pay in the £100 but because it reduced my pay I pay less tax ad this is where I am better off.

Sorry if its a stupid question

[RobertT]

Hi All,

I pay into a AVC so with regards to tax relief how does this work on £100.

Would it mean I actually pay in 67p and the gov pays the rest or does it mean I pay in the £100 but because it reduced my pay I pay less tax ad this is where I am better off.

Sorry if its a stupid question

Before the introduction of PSE(assuming you didn’t opt out) a £100 investment by you into an AVC would mean that less of your pay is assessed for tax purposes, so in turn you would pay less tax. A £100 weekly contribution would mean that £20 is being taken off your income tax bill so it’s effectively only costing you £80.
If you have any of your old payslips before PSE came in, preferably for week 1 of the tax year to make it easier, you will have seen your assessable pay is less than your gross pay by however much you pay into RM pensions, plus any other tax efficient payments you may make like cycle to work, etc.

However since PSE was introduced things are a little different. You still get the tax relief, but you also save on NIC’s aswell. That is a saving of another £12 on a £100 gross investment. Meaning the overall cost is only £68.
The reason for the savings in National Insurance is that Royal Mail now pay your pension contributions instead of you, so in effect you’re earning less and so pay less NIC’s. RM also make savings on NIC’s because of this.
If you look at a more recent payslip, the gross and assessable figures should now be the same.

I hope that makes sense.

[Hawkey99]

Hi Robert,

thanks for your reply. Greatly appreciated.

So the tax saved gives me a higher take home pay.

Thanks

[RobertT]

If tax relief and salary sacrifice(PSE) didn’t exist it would mean a £100 contribution into your AVC would cost you £100. With those incentives it means it’s only actually costing you £68 with the government making up the difference.

Depending on how you look at it, you could say that you’ve got £32 extra in your pocket, or you could say that the government is giving you £32.

Either way it’s a 47% uprating of your money and damn good way to save.