Navigating Universal Credit and Your Pension: Crucial Deductions Explained

For individuals navigating the complexities of Universal Credit (UC), every pound counts. A crucial, yet sometimes challenging, aspect of this system involves how pension contributions are treated when calculating your benefit entitlement. Good news for those diligently saving for their future: money paid into a pension can indeed be deducted from your income before your Universal Credit is calculated, potentially leading to a higher award. However, as one UC claimant recently discovered, ensuring these deductions are correctly applied can sometimes be a battle.

A reader on Universal Credit, contributing to both a workplace pension and a personal pension, recently shared their frustration at having difficulty persuading Universal Credit to deduct their personal pension contributions from their income. This highlights a common point of confusion for claimants.

Are Your Pension Contributions Deductible? Absolutely, and Here's How

The definitive answer is yes: your pension contributions are deductible from your income for Universal Credit purposes. This applies to both workplace pensions and personal pensions. The core principle behind this is that pension contributions are not considered as 'earnings' for UC assessment. By reducing your countable income, your Universal Credit payment could increase, as UC payments are tapered (reduced) by 55p for every £1 of net earnings above any applicable work allowance.

Gross vs. Net: How Much is Deducted?

This is where it gets a little more nuanced, depending on how your pension contributions are made. The good news is that Universal Credit aims to deduct the gross amount of your pension contribution. This includes any basic rate tax relief that HMRC adds to your pension pot.

There are generally two ways pension tax relief is applied:

Net Pay Arrangement: In this scenario, your employer deducts your pension contributions from your salary before tax is calculated. This means you only pay Income Tax on your wages minus your pension contribution. For Universal Credit, the earnings figure sent to the Department for Work and Pensions (DWP) by HMRC should already reflect these deductions, so the correct net amount is used.

Relief at Source Arrangement: With this method, you pay your pension contributions after tax has been deducted from your wages. Your pension provider then reclaims the basic rate tax relief (currently 20%) from HMRC and adds it to your pension pot. In this case, the amount to be deducted for Universal Credit purposes should be 'grossed up'. This means you multiply the amount you paid by 100 and then divide by 80 (effectively multiplying by 1.25) to account for the 20% tax relief.

For example: If you pay £80 into a personal pension under a 'relief at source' arrangement, HMRC would add £20 in tax relief, making a total contribution of £100 into your pension. For Universal Credit, the full £100 should be deducted from your income.

What to Do if You Face Challenges

If you are on Universal Credit and making personal pension contributions, and you encounter difficulties in getting them correctly deducted, here's what you should do:

Communicate via your Universal Credit Journal: This is your primary method of communication with the DWP. Clearly explain that you are making personal pension contributions and that you believe they should be deducted from your income for UC calculation.

Provide Evidence: Be prepared to provide evidence of your pension contributions. This could be bank statements showing payments to your pension provider or statements from your pension provider confirming your contributions.

Clarify the Method of Tax Relief: Crucially, explain whether your contributions are made via a 'net pay arrangement' or 'relief at source' scheme. This will help the DWP assess whether the contributions need to be 'grossed up' for deduction.

Seek Advice: If you continue to face issues, seek advice from independent welfare rights organisations like the Low Incomes Tax Reform Group (LITRG) or Citizens Advice. They have in-depth knowledge of Universal Credit regulations and can help you advocate for your rights.

The system is designed to reward those who save for their future, even while on Universal Credit. By understanding how your pension contributions affect your entitlement and by being proactive in communicating with the DWP, you can ensure you receive the full benefit you are due.