Home Money I have Universal Credit: will my private pension payments be taken into account? STEVE WEBB responds

I have Universal Credit: will my private pension payments be taken into account? STEVE WEBB responds

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Query: A This is Money reader has recently switched to Universal Credit

I have received a working tax credit whilst also making contributions to my personal private pension with Scottish Widows over an extended period.

These contributions were facilitated through direct debit payments to my bank account, allowing me to deduct 100 per cent of the pension contributions from my annual salary.

Following my transition to Universal Credit, I requested clarification on the treatment of my private pension contributions.

The competent authority informed me that only my salary, taxes, national insurance and company pension are taken into account in the assessment.


Query: A This is Money reader has recently switched to Universal Credit

I was previously assured that transitioning to Universal Credit would not put me at a disadvantage.

However, the disparity in the treatment of private pension contributions leads me to seek your guidance on this matter. Your quick advice on this topic would be greatly appreciated.

Steve Webb responds: People who receive tax credits (either working tax credit or universal credit) enjoy an extra incentive to save into a pension.

This means that the amount paid into your pension can be deducted from your income when your tax credits are calculated.

This usually means that someone who saves for a pension will get more tax credits than someone on the same salary who doesn’t contribute to a pension.

Please note that this applies equally to the old ‘Working Tax Credits’ system and the new Universal Credit system.

Anyone receiving tax credits should ensure that the income used to calculate their benefit has had pension contributions removed.

It seems to me that you may have been given incorrect information on this.

However, there is a complication to all of this that you should be aware of and which I believe is causing confusion in your case.

Please note: There are two ways people can receive tax relief on their pension contributions

Please note: There are two ways people can receive tax relief on their pension contributions

As I explained in previous columns, there are two ways in which people can receive tax relief on their pension contributions. There is:

‘Relief at the source’ – this is the normal method for personal pensions (like yours) and is also the method used by the Government’s NEST pension scheme; Under the source relief method, you pay the pension out of your take-home pay and HMRC offers basic rate tax relief through a payment to your pension fund; For example, if you pay £80 into a pension from your take-home pay, HMRC will add £20, giving you £100 in total; the £100 figure is the “gross” pension contribution; Higher rate taxpayers can report this gross figure on their tax return and claim additional tax relief above the base rate;

‘Net payment agreement’ – this is the approach used by many “occupational” pension schemes; In this case, the “gross” contribution is deducted from your payroll before your taxes are calculated; This means that your contribution goes towards your pension taking into account all the tax reliefs you are entitled to and no further claims need to be made;

The relevance of all this to your claim for tax credits is as follows.

Because you are paying into a personal pension (and because the money goes directly from your bank account into the pension), your provider is operating the ‘Relief at Source’ method.

This means DWP must deduct from your income figure the actual amount you are paying plus tax relief (£20 for every £80 you contribute). If they refuse to do this, I think they should be questioned.

If you had a pension using the ‘Net Pay Arrangement’, the earnings figure on your Universal Credit claim form should be your gross salary *after* the gross pension contribution has been deducted.

In this deal, I suspect the DWP automatically takes pension contributions into account when calculating people’s Universal Credit.

Ultimately, if you have been told that your personal pension contributions cannot be taken into account, this is incorrect and you should appeal this decision.

In case it’s useful, this official guidance (ADM Chapter H3: Earned income – employed income (publishing.service.gov.uk)) makes it quite clear that while pension contributions made under ‘net pay’ arrangements are already will have been taken into account and warns against double counting, it is quite clear that ‘total reimbursable pension contributions’ must be deducted from income for UC purposes.

This will include payments into personal pensions.

Finally, a reminder to the millions of people on Universal Credit, many of whom will also pay a pension into their workplace, that this is all worth checking.

For those paying into a personal pension or another scheme (such as NEST) that uses the ‘relief at source’ method, the DWP must deduct these contributions when calculating your UC entitlement.

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Ask Steve Webb a question about pensions

Former Pensions Minister Steve Webb is This Is Money’s agony uncle.

He’s ready to answer your questions, whether you’re still saving, in the process of quitting working, or juggling your finances in retirement.

Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuarial and consulting firm Lane Clark & ​​Peacock.

If you would like to ask Steve a question about pensions, email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to respond to your message in a future column, but will not be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message; This will be kept confidential and will not be used for marketing purposes.

If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pensions support to the public. can be found here and its number is 0800 011 3797.

steveWe receive many questions about state pension forecasts and COPE (the outsourced pension equivalent). If you write to Steve about this topic, he answers a typical reader question about COPE and the state pension here.

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