Work Pensions and CMS

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.

Shared Care and Child Maintenance

Shared Care and Child Maintenance

When a parent makes an application to the Child Maintenance Service they calculate the amount due, using a formula that depends upon a number of factors such as the number of children, the paying parents income and how many other children the paying parent may have.

They then discount that amount to cater for shared care.  Shared care is where the paying parent shares some evening care responsibilities.

For each night on an average week, a paying parent is expected to have the children they take off 1/7th or about 14%.  They have to estimate, based on patterns, or if a court order exists, they base the discount on that.

You do not need to have a court order to prove shared care.  A regular pattern can be used as evidence.  For example if a child stays with the paying parent every Friday and Saturday night, it will be assumed that over the year they will stay with them 54 times.

This qualifies as a 2/7ths discount or a 28% reduction in maintenance to pay.  

The formula is set in legislation, meaning that it cant be changed by the CMS.  It is generally considered that where the child is sleeping at midnight determines where they are being cared for.  

Shared Care Breakdown

• 52 to 103 nights per year equals a 1/7th reduction.
• 104 to 155 nights per year equals a 2/7ths reduction.
• 156 to 174 nights per year equals a 3/7ths reduction
• More than 175 nights equals a 50% reduction and an extra £7 per week reduction for each child in the band.

It is therefore very important that both parents are aware of the shared care discount as it will affect the money.

Where parents are in dispute, the CMS will make a decision which is normally based in favour of the parent with care.  (This is because it is rare for a parent with care receiving money to say they have a child less than the paying parent states).

For example if the paying parent says the child stays for three nights, and the other parents states one night, they will grant one night shared care, as both parties have agreed its at least one night.  However its possible to argue this and overcome the issue, by appealing using the Mandatory Reconsideration process.

What About Day Care?

The CMS do not take daycare into account.  If the child stays with the receiving parent every night, but is looked after by the paying parent all day, the paying parent has to pay 100% of the child support maintenance due. 

However day care is important when dealing with HMRC concerning child benefit.

What About Other Discounts?

The amount of child maintenance charged can also be reduced by taking into account pension contributions, special expenses and other children.  

• To see how child support payments can be reduced for pensions, click here.
• To see how child support payments can be reduced for expenses, click here.
• To see how child support payments can be reduced due to other children, By clicking here..

Example

A child stays with the paying parent from Saturday morning, until 9pm on the Sunday.  They then sleep at the other parents house.  In this example, the child only sleeps at the house for one night, so only one night of shared care is discounted.  It may be two days, but only the nights count.

Summary

The Child Maintenance Service formula for calculation of child support is set by parliament, so cannot be deviated from  Its has many aspects, but the most important is shared care.  One night shared care per week, can reduce child maintenance by 14%.

Further Resources

Child Maintenance A Guide for Parents 

Useful Links

Buy me a coffee please! Please support via Paypal

Facebook: https://www.facebook.com/groups/197227785636347

Youtube Guides www.youtube.com/@childmaintenanceuk #childmaintenanceservice

#cms

#childmaintenanceuk
#sharedcare

Child Support 25 Percent Rule

When dealing with the Child maintenance Service, there is one misunderstood topic, known as the 25 per percent rule, which applies to child maintenance calculations, where there is a child support case through the Child Maintenance Service. The 25% rule might sound complex, but fear not, we're here to break it down for you. Simply put, this rule dictates that for your income to trigger a change in your Child Maintenance Service (CMS) calculation, it must either increase or decrease by at least 25 percent within a year. Let's unpack this further in the video below, and the text that follows.

The 25 Percent Rule in a Nutshell Imagine your income as the cornerstone of the CMS calculation. Its the most important part of the different parts of the CMS maintenance calculation. When you open a child support case with the CMS, they obtain from His Majestys Revenue and Customs known as HMRC, your most recent tax year to determine the percentage of your salary that needs to be allocated for child maintenance. Fast forward a year, and the CMS conducts an annual review by assessing your salary from the following tax year. This process is relatively straightforward when your income remains stable or only fluctuates slightly, say by three percent, from year to year. If it goes up by three percent, you pay more. If it goes down, you pay less. Understanding the 25 Percent Threshold Here's where the 25 percent rule comes into play. If your income changes by more than 25 percent between the two tax years up or down, your CMS calculation will adjust during the year, and not at the next review. The 25 percent rule primarily addresses changes that occur during the year, not as a basis for annual reviews. Examples to Clarify Let's consider a couple of scenarios. In the first case, Person A earns a salary of £10,000 per year, which increases to £12,000 per year. As this increase is not a 25 percent change, the CMS calculation remains unchanged for the rest of the year. However, this increase will be factored into the following year's CMS calculation. In contrast, Person B has a job paying £20,000 per year, and they receive a substantial pay rise to £30,000 per year. Since this increase exceeds a 25 percent change, the CMS calculation should be recalculated at this point, leading to an increased payment for the remainder of the year. This means that the income changes from historic to current income. Bonuses and Temporary Changes You might be wondering about annual bonuses or temporary income spikes. If your salary temporarily increases by less than 25 percent within a 12-week period, you usually don't need to notify the CMS. Temporary changes of less than 25 percent are often considered temporary by the CMS and are addressed during the annual review. However a bonus is normally taxable, so if it does not trigger an increase, your CMS may be higher in a future year, when they use the income from the bonus year to do the calculations. A Word of Caution A common pitfall is when people report a 20 percent increase in their salary to the CMS, and it's occasionally accepted even though it doesn't meet the 25 percent threshold. Also, situations arise where someone's salary jumps by 30 percent and then drops by 15 percent. The CMS might decline to decrease the payment, leaving the individual stuck paying the higher amount until the next annual review. Final Thoughts The 25 rule isn't as complicated as it may seem at first. To trigger a change in your CMS calculation, your income must increase or decrease by at least 25 percent within the year. This rule ensures that minor fluctuations won't require immediate adjustments, sparing you from unnecessary communication with the CMS. Always remember that temporary changes under 25 percent are always addressed during the annual review. On your Child Maintenance Service review date, the CMS will produce a new calculation which will be revised up or down, depending upon a change of income by at least £1. Its not a case that your income has to change by 25% in order for the calculation to change. If you found this guide helpful and want more information on specific topics, feel free to leave your queries in the comments. Don't forget to like and subscribe for more valuable insights, and together, let's make the child maintenance journey smoother for everyone.

Buy me a coffee please! Please support via Paypal Facebook: https://www.facebook.com/groups/197227785636347 Youtube Guides https://www.youtube.com/@childmaintenanceuk Amazon - https://amzn.to/3EyVAue