Tax savings
One reason you might choose to save for your retirement with an AVC plan, alongside your main scheme pension, is the tax savings AVC contributions offer.
You have the choice of paying your contributions with an AVC plan or a Salary Sacrifice Shared Cost AVC plan. Tax savings made with these plans differ. Below we explain how.
If you already have an AVC plan and want to make future contributions as Salary Sacrifice Shared Cost AVCs, then you’ll need to start a new plan.
With Salary Sacrifice Shared Cost AVCs, you agree with your employer to reduce your pay. In return, your employer will pay an amount equal to the reduction in your pay, into an AVC pot in your name. This will reduce your earnings and you'll pay less income tax and National Insurance, depending on your personal circumstances (as you can see below, for a 20% rate taxpayer paying 8% NI). For more information about the rate of National Insurance visit the HM Revenue & Customs website.
You’ll also have to contribute a total of £1 each time your employer pays your Salary Sacrifice contributions. If you're a 20% rate taxpayer, a £1 contribution will cost you £0.80. The £0.20 you'd pay in income tax would go into your AVC pot instead. If you pay tax at a higher rate, the cost to you will be even less. You’ll normally make income tax savings on the £1 contribution, but not National Insurance savings.
If you don't pay tax, you won't have been benefiting from tax savings on your pension contributions up to 5 April 2024. The Government has introduced arrangements for individuals who are not paying tax on their earnings to claim tax relief on their employee contributions to the scheme. This applies to the £1 contribution paid by you from 6 April 2024 onwards, but does not apply in respect of salary you are exchanging for an employer contribution to your pension. As a result, if you're not paying any tax and are exchanging salary for an employer contribution to the scheme you will not have tax relief on the salary exchanged.
You will need to contact HMRC to arrange this tax rebate. Claims will be processed in the tax year following the year claimed, i.e. claims for the current tax year would be processed by HMRC in the next tax year.
The process is simple and it's all done for you by your employer. Salary Sacrifice Shared Cost AVCs may not be suitable or possible for some members. Your employer can provide you with further details of how salary sacrifice works in their salary sacrifice shared cost arrangement.
Regular AVCs are taken from your pay before tax, so the money you’d normally pay as income tax will automatically go into your AVC pot instead, as you can see below. If you pay tax at a higher rate, your tax savings will be higher. If you don't pay tax, you won't benefit from tax savings.
Income tax on pension savings
The total amount of tax relief you get on your pension savings is limited so make sure you're aware of the 'Important information about pensions allowances'. The UK Government may change these allowances from time to time so check their website to see any changes which may impact you. If you think you might be affected, you can get more information from the HM Revenue & Customs website.
If you're a member of a Salary Sacrifice arrangement, please speak to your employer about how this may affect you.
Tax savings will depend on your individual circumstances and rules can also change.
Your rate of income tax
As your contributions, including any paid by Salary Sacrifice, are deducted from your earnings before your tax bill is worked out, the amount of income tax you pay will be based on what’s left.
If you're a Scottish taxpayer, you’ll pay tax based on the Scottish rate of income tax and tax bands. For more information on Scottish income tax, visit gov.uk/scottish-rate-income-tax.
If you're a Welsh taxpayer, you’ll pay tax based on the Welsh rate of income tax and tax bands. For more information on Welsh income tax, visit gov.uk/welsh-income-tax.
More information
Flexible contributions
Change your contributions to suit your needs and circumstances.
Your investment choices
When it comes to choosing where to invest your AVCs, there's no need to feel overwhelmed.
Trusted provider partnership
Prudential is an appointed AVC provider to 72 of 99 Administering Authorities within the LGPS.
"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.