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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Pension contributions: effect on state benefits

It may be useful to know that the overall cost of pension contributions may be lower than you think if you are on tax credits or universal credit (UC). This is because in the calculation of tax credit and UC income, you are able to deduct 100% of pension contributions – resulting in a higher award. There may be interactions with other state benefits to be aware of. Here we look at this in more detail.

Content on this page:

Overview

If you get a means-tested benefit like universal credit or tax credits, your pension contributions reduce the amount of income that is taken into account in assessing your award. This could mean a higher award of universal credit or tax credits is made to you.

You can read more about these state benefits on our pages Tax credits and Universal credit.

Sometimes you can use pension contributions to help you qualify for or reduce clawbacks on other benefits.

Tax credits

Tax credits are based on gross income. By this we mean your income before tax and National Insurance contributions are deducted.

The affect that any pension contributions will have on your tax credits award will depend on whether the pension scheme you pay into operates as a:

  • relief at source scheme; or
  • net pay scheme.

We discuss the difference between these on our page How tax relief is given on pension contributions.

Net pay scheme

If you make contributions to a pension under a net pay arrangement as an employee, then the taxable income figure on your P60 will already reflect your pension contributions. You will not need to make any further adjustments for pension contributions.

Relief at source scheme

If you are paying into a relief at source scheme, the gross income figure from your P60 will not reflect any pension contributions and you will therefore need to deduct your pension contribution amount from your income figure when you report it to HMRC.

The amount to deduct is the amount of pension contribution ‘grossed up’ by 100/80 (this means you multiply the amount you paid by 100 and then divide the amount by 80) – to reflect the 20% top up that will be claimed from HMRC by your pension scheme.

Example

Rosin pays £50 into a relief at source pension in the 2023/24 tax year. The amount that can be taken off her tax credits income is £50 multiplied by 100 and divided by 80 – that is, £62.50.

Universal credit

Universal credit’s ‘taper rate’ of 55p in the pound means that a £100 pension contribution over the course of a year could result in a £55 increase in your UC award depending on your level of award and circumstances.

Carer’s allowance

We look at the relationship between pension contributions and carer’s allowance in this part of our website.

Child benefit

Child benefit is tax free, although if you claim child benefit and either you or your partner has adjusted net income of more than £50,000, the higher earner will be liable to pay the high income child benefit charge (HICBC).

Your adjusted net income is your total taxable income – your salary plus any benefits you get from your job, rental income and so on, minus things such as pension contributions and gift-aided donations to charity.

Therefore, the more pension contributions you make, the lower your adjusted net income. This may mean you can reduce or avoid altogether, the HICBC.

Other benefits

Pension contributions may impact on other benefits. You should check the position carefully for whatever benefit you are claiming. The steps you need to take to make sure the authorities know about your pension contribution amounts might depend on whether you are in a net pay scheme or relief at source.

You can read more about this on our website for advisers, RevenueBenefits.

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