Everyone should consider paying into a Pension to supplement the State Pension which at the time of writing is worth, £134.25p per week. However the difficulty is that if you are making maintenance payments you may struggle to do so.
However there is the possibility of some relief to help you out. In a nutshell, paying into a pension reduces your taxable income, and therefore less CMS is payable when that income year is taken into consideration, the following year.
For example if you earn £20K per year, you pay CMS on 20K.
If you pay £2K per year into a pension, that is subtracted from your income, meaning that you only pay CMS on £18K.
Note. You have to provide CMS evidence of contributions if you pay into a private pension, not through salary. I.e, Send them your pension statement showing your contributions for the tax year, after the tax year has ended.
Regulation 40 of The Child Support Maintenance Calculations Act 2012 enshrines in law that child maintenance payments can be reduced to take into account pension contributions, but a past tribunal case, confirmed that CMS can consider a limit on the transactions.
Despiter the fact, that since April 2023, the government have allowed people to contribute £60,000 per year into a Pension, the CMS have their own view. CMS Policy and Procedures advise staff to consider if pension contributions are excessive. They do this by using two tests.
Whats Best? A Work or Private Pension.
This is a blog concerning Child Maintenance and the Child maintenance Service policies. Its not an investment blog, nor does it provide financial advice. You should do your own research and consider independent financial advice.
From a non investment view, we would suggest that your work pension is the easist to manage when it comes to the Child Maintenance Service. This is because normally your income reported to HMRC is after pension deductions. As a result CMS will not know how much of your salary has been reduced by the pension as they only see the gross income after the pension has been removed.
However some employers take the pension after deduction of tax and National Insurance. This means CMS see the whole income.
Where someone pays into a private pension, CMS see the whole income, and have to make a deduction for the private pension, once evidence (in the form of the annual pension statement), is provided.
This means that each year the CMS produce a calculation based on a tax year, and then you have to send the pension statement into claim the reduction. Do not send it in before the calciulation as CMS staff wont be able to adjust until the Annual Review is complete. The Annual Review is automatic, and done by computer and this prevents staff from adjusting the calculation, before it is produced.
Test One: Are the contributions appropriate for the age of the person contributing?
They test this by looking at the pension contributions being made and compare it to defunct Financial Services Agency (FSA) guidelines try to establish if someone is trying to avoid maintenance by paying into a pension.
The starting point is that by paying 12% of a salary to a pension, its not excessive.
Above 12% they make an age based comparison using the old FSA guidelines:
| Age contributions started | Required % of income |
| 30 | 12 - 18% |
| 35 | 16 - 22% |
| 40 | 18 - 25% |
| 45 | 25 - 30% |
| 50 | 30 - 45% |
| 55 | 45 - 70% |
So in theory, someone who is 50 years old can start making pension contributions of 45% of their salary.
The important thing to remember is that legally you can put £60,000 per year into a pension, where as CMS use the percentages above as a guide. Whats more, in recent months CMS have been telling people at the top end of the age range, 40 plus for example, that because their pension started 20 years ago they can only put in the 12-18%.
We do not think that is fair and that should be argued. Someone may have opened a pension when under 30, but may not have put enough contributuions in, or made some bad investment decisions, therefore we feel that CMS have no grounds to stand on regarding this, and the only bar on pension contributions should be the 60K annual contribution allowance. Please get in touch if CMS are telling you otherwise.
Test Two: Do the Pension Contributions provide a pension benefit greater than current income?
In short they look at the pension benefit statement. If that shows that the pension benefit is going to produce an income greater than the current income, contributions are probably excessive.
For example, someone earning £20,000 should not be contributing so much that they will have a likely pension income of £30,000.
Remember, pension contributions, must not be done in order to avoid paying child maintenance. They must be made to provide a pension.
Tip: Pay a regular amount, avoid making single contributions at the end of the tax year, to lower future liability as this might be considered to be due to avoid paying maintenance.
If you dont understand pensions, I have made a video to try to explain how they affect CMS liability. Neither this blog, or the video, should be considered to be financial advice.
One thing to note, is that where pension contributions are made to a private pension, ie from someones bank account and not from by salary, the pension relief needs to be claimed.
To claim, the pension statement which shows the contributions, and the tax relief applied needs to be sent to the Child Maintenance Service. The most efficient way to do this is to upload the full statement to the portal. In quiet times of the year, the calculation will then normally be lowered from the next payment.
Higher rate tax payers can normally claim back higher pension tax relief via their tax return. In order for that contribution to be taken into account, the HMRC tax calculation should be sent to the CMS.
Further Information:
Child Maintenance - Book available from Amazon.co.uk
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Child Maintenance Regulations Concerning Pension Contributions
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