Universal Credit is a means-tested state benefit aimed at providing support to individuals with a low income. Through this blog post, we aim to learn about how Pension Contributions affect the Universal Credit payments of individuals. To understand how different financial circumstances bear an impact on your Universal Credit claim, we will explore different real-life scenarios and also discuss how Universal Credit can be claimed. 

How Do Pension Contributions Affect Universal Credit?

Pension contributions do not affect your Universal Credit payments. This means that if a Universal Credit claimant pays into an occupational or personal pension scheme, the entire amount is disregarded when a means test for Universal Credit is conducted. 

This is the reason why the recent (2019) increase in Pension Contributions from 3 per cent to 5 per cent does not reduce your Universal Credit claim. In fact, this increased contribution can decrease your take-home wages due to which a reduced income can actually increase the amount of Universal Credit claim. For an accurate estimate of income and benefits, you must consult the DWP or use an online benefits claim calculator.

On the other hand, if someone is claiming any of the following benefits, only 50 per cent of their pension contribution will be disregarded for a benefits claim:

  • Housing Benefit
  • Job Seekers Allowance
  • Employment Support Allowance
  • Income Support

Claimants should note that when a means test is carried out for benefits claim, the following types of income are taken into account for benefits claim and that too for income-based benefits:

  • Cash
  • Stocks and shares
  • Savings
  • Assets
  • Investments (rent, dividend, interest)
  • Unearned income (pension payments, student income)

The amount of Universal Credit that an individual receives depends on their personal circumstances and income (if any). For instance, someone who is single and younger than 25 years of age will be eligible for Universal Credit amounting to around £257 per month. Meanwhile, this amount will rise to around £509 for someone who is living with a partner and either one of them or both of them are above the age of 25.

How Does A Gift Of Money Affect Universal Credit?

A one time gift of money or small amounts of it at varying intervals will not affect your benefits including Universal Credit. Additionally, the amount of money that you may receive from friends, family or charitable sources is not included in the means test for benefits.

However, should you incur regular/periodic payments from friends, family or charity, these will be added under the “savings” section for your benefit claim. This is applicable if you receive large amounts of gift money and your total savings exceed £6,000.

Monetary gifts in the form of an annuity are considered an income and will bear an impact on your benefits claim. However, voluntary payments from a former partner or parent of a child are not considered a gift of money.

How Does Owning A House Affect Universal Credit?

While you can claim benefits such as Income Support and Job Seekers’ Allowance if you own a house; however, you will no longer be eligible for Housing Benefit or the housing element for Universal Credit. The reason for this lies in the fact that to qualify for benefits that pay for housing costs, claimants need to be able to fulfil the following criteria:

  • be at least 16 years old
  • have a low income or be claiming other benefits
  • have less than £16,000 in savings

If your house is mortgaged, you can still claim benefits and use the sum of payments received to pay your mortgage interest.

You can also continue claiming benefits if you own a home through the joint ownership scheme. In this case, you will also be able to claim Housing Benefit or Universal Credit Housing Cost element for your monthly rental or mortgage payments. 

Does A Tax Rebate Affect Universal Credit?

Yes, a tax rebate affects Universal Credit as it counts as income when a means test is carried out for benefits claims such as Universal Credit. However, the recipient is not required to pay income tax on a tax rebate.

Capital valued between £6001 and £16,000 will affect your Universal Credit claim (if you have capital beyond this amount you will no longer be eligible for Universal Credit).

Below is a list of income-based benefits that are affected by your income, savings, assets and investments:

  • Council Tax Support
  • Housing Benefit
  • Income Support
  • income-based Jobseeker’s Allowance
  • income-related Employment and Support Allowance
  • Pension Credit
  • Tax Credits (Child Tax Credit and Working Tax Credit)
  • Universal Credit

Will Universal Credit Know If I Get A Tax Rebate?

No, Universal Credit or the Department for Work and Pensions will not know on their own or even through the HMRC that an individual has received a tax rebate. It is the claimants’ responsibility to declare a tax rebate as it counts as additional income during the period that it was received and bears an impact on your Universal Credit payments during this time.

Since your entitlement for Universal Credit depends on your household income, an increase through tax rebate is likely to reduce your UC payments during the time of receipt. The challenge occurs when you’ve received a tax rebate as a result of an incorrect tax code and have been allowed a tax rebate in error. Even though the error may be corrected at a later stage by the HMRC and the excess amount recovered, it will remain a struggle.

If a claimant deliberately hides such information from the DWP, they may find themselves in a difficult situation in the future. If the DWP finds out that income-related information was deliberately hidden by a claimant, they can not not only ask you to refund the excess amount but also sanction your future payments due to benefits fraud.

Can I Get A Tax Rebate Through Wages?

Yes, if you have overpaid your tax paid through wages under the PAYE scheme, you can get a tax refund by contacting the HMRC. 

When you call HMRC about your tax refund due to overpayment, you must make sure that you have the following information available to you:

  • your personal details: including  your full name, address and date of birth
  • your National Insurance number
  • details of your employers or pension providers and their PAYE scheme reference number
  • Detailed estimates of your earnings and/or pensions from each source for the current tax year (with documentation)

Why Have I Overpaid My Taxes?

The reason(s) why salaried individuals may overpay their taxes through a PAYE scheme may be classified as follows:

  • They started a new job and were assigned an emergency tax code on a temporary basis
  • Their employer used an incorrect tax code
  • They held a job for a part of the year (and not the entire tax term)
  • They had more than one job at the same time
  • They are a student who only worked during holidays
  • Their “other incomes” have been reduced
  • They stopped working in the middle of the year and had no taxable income or benefits
  • Their circumstances changed; such as moving from full time to part-time work

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can claim a tax refund and reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made for up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

Who Is Eligible For Universal Credit?

To qualify for Universal Credit, claimants must be able to fulfil the below eligibility criteria:

  • aged between 18 (in some cases it may be 16 or 17) and state pension age
  • unemployed or on low income
  • between the claimant and their partner, total savings are less than £6,000
  • experiencing high costs for childcare
  • suffering from a disability or health condition
  • caring for someone else

How Much Can I Claim With Universal Credit?

The basic rate for Universal Credit (without top-ups for housing and childcare) can be classified as follows:

  • If you are single and under 25, you can claim £257.33 a month
  • If you are single and 25 or over, you can claim £324.84 a month
  • If you are living with a partner and both of you are under 25, you can claim £403.93 a month
  • If you are living with a partner and one or both of you are over 25, you can claim  £509.91 a month

Conclusion:

The discussion in this article makes it clear that Pension Contributions are completely excluded from a means test for Universal Credit and therefore have no effect on the amount you claim. However, Pension Contributions are only disregarded by half the amount when other state benefits such as Housing Benefit, Job Seekers Allowance, Employment Support Allowance and Income Support are taken into consideration. In case there is an increase in your Pension Contirbution causing your income to reduce, you may be able to claim an increased amount of benefit.

FAQs: How Do Pension Contributions Affect Universal Credit?

What counts as income for Universal Credit?

Earnings including cash, stocks and shares, savings, assets, investments (rent, dividend, interest), as well as unearned income from pension payments and student income are all counted as income for Universal Credit.

How much tax relief can I claim on pension contributions?

You can claim 100 per cent tax relief on pension contributions as these are tax-free. 

Do pensions affect benefits?

Pensions are considered a source of income and affect your benefits claim during a means test. If you withdraw a lump sum amount from your pension pot, it will be counted as capital and will reduce or even disqualify you from a benefit claim.

Does State Pension affect Universal Credit?

Yes, state pension affects Universal Credit. However, in the case of couples, if only one of them has reached the state pension age, UC payments will remain unaffected until the other partner also reaches that stage.

Can you claim State Pension and Pension Credit?

Yes, you can claim State Pension and Pension Credit. However, your state pension claim can reduce in amount if you are also a recipient of pension credit.

References:

Universal-credit-affected-tax-rebate.

What-will-affect-your-universal-credit-payments

The economics of universal credit | Tax Adviser

What is income for UC? « Entitlement to Universal credit « Guidance «

Does-tax-rebate-affect-Universal-Credit

Will my Universal Credit be affected if I get a tax rebate in April?.

How do I claim back tax I have overpaid through PAYE on wages or pensions? | Low Incomes Tax Reform Group

Claim a tax refund – GOV.UK

How do savings and lump-sum payouts affect benefits? | MoneyHelper

What is income for UC? « Entitlement to Universal credit « Guidance «

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John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.