Pensions and Employment
If you are offered a work pension scheme, and your employer contributes to it, it is almost certainly a good deal. After all its free money, and the response of most people is to take as much of the free money in matched pension contributions as possible. But generally people dont put in more than that. Lets face it, pensions are not exciting, and there are more demands upon your money. However there is one time when you should consider putting more into a pension and that is when you have children, particularly if you are making contributions to child support in the UK, using the Child Maintenance Service.
Why Invest in a Pension
The are several reasons to invest in a pension. Pensions allow you to save for your retirement. If you die, before you start taking the pension, it may be passed to your beneficery outside of your estate. However as this blog concerns child maintenance lets look at how pension contributions affect child support calculations.
There are six steps to a CMS calculation. The first step is to take your annual income, using HMRC records for a particular tax year. We will use the 22/23 tax year as an example.
The next step is to deduct from the annual income any special expenses payments, such as for travel, and also deduct any pension contributions. In doing so, the annual income is reduced.
Example 1
Someone earnt £30,000 in the 22/23 tax year. They then paid £3600 in pensions via an employers scheme, equivalent to £300 per month
CMS contributions are discounted from the gross income. In this case, the effect of this is to reduce the salary from £30,000 to £26,400. From this point the CMS calculation starts to come together.
In this case, the pension was made through an employers scheme. Which in the majority of cases, means the income for the year reported to HMRC is after the deduction.
So HMRC record a total income of £26,400. And CMS base their income calculation on £26,400. CMS are not aware of the pension contribution, and they do not need to be told about it, as the pension has been removed from the income.
When you look at the child maintennace Portal it is normal for it to say £zero pension contributions, when you pay via a workplace scheme. An explanation for that is here.
https://youtu.be/bowRzEem1aA
What if my contributions are not reducing my CMS
However, there is a flaw with employer contributions. Some employers take the pension contributions, after deduction for National Insurance and Tax. So they are made from Net pay. This means that the deductions are not automatically reduced from the CMS calculations. In order to get them reduced you will need to send them the evidence of the pension contributions, ie the pension statement, which is produced at the end of the tax year.
This also means, that when the paying parent looks at the CMS website or their paperwork it will show as £ zero pension contributions. This is correct.
Example 2
Someone earnt £30,000 in the 22/23 tax year. They then paid £3600 in pensions via an employers scheme, equivalent to £300 per month
CMS contributions are not discounted from the gross income In this case, the gross salary has not been reduced, so it is reported that the employee was paid £30,000.
In order to get it reduced, the employee has to send the pension statements in after the tax year ends.
Common Questions.
a. If I pay 26% all more of my salary into my work pension, will it reduce my CMS each month due to the 25% rule?
No and yes! It will, but not in the same tax year. If you ask CMS to reduce due to breaching the 25% threshold, they will ignore your pension contributions. So by paying more than 25% you will receive 25% less pay, and you will have to still pay CMS on the full income. But all is not lost.
The increased pension contributions will reduce your CMS calculations in a future year, when that tax years income, less pension contributions is used to calculate the liability.
So if in the 22/23 tax year, you pay 25% or more into a pension, when that tax year is used, in either 23/24 or 24/25 tax years, you will pay 25% LESS!
b. What about private pensions?
Private pensions are covered here at: How The Child Maintenance Service Treat Private Pension Contributions
c. If I get a payrise, will the CMS take more money off of me?
Yes they will, when that tax year is used for your calculations. However if you pay the payrise into a pension, the pay rise is effectively cancelled out.
Disclaimer: None of this article, or any other article should be considered to be independent financial advice. The opinions expressed are based on experiences dealing with the Child Maintenance Service on child support issues. Legislation may change the validity of the examples and information.