If you are a member of the LGPS, you will be aware that the rules allow you to build up your pension benefits by paying Additional Voluntary Contributions (AVCs) by way of a tax free deduction through payroll. If you choose to pay AVCs, they are invested separately from your main LGPS benefits and provide you with additional income upon your retirement.
In accordance with the terms of the LGPS, an employer can also contribute to an employee’s AVC arrangement. This is known as a Shared Cost AVC (AVC Wise) which can be provided through a salary sacrifice arrangement. Our salary sacrifice AVC Wise arrangement is called AVC Wise.
If your employer operates AVC Wise and you choose to participate in this arrangement, the advantage is that you will not pay tax or NICs on the amount salary sacrificed. As a result, the salary sacrifice arrangement provides an opportunity for you to save NICs in addition to the usual tax savings, thus increasing take-home pay when compared to paying AVCs in the standard way.
John’s salary is £25,000 per year and he currently pays £3,000 in AVCs per year. As John is a basic rate taxpayer, he currently receives £600 tax relief on the AVC payments. Therefore, John’s current annual net AVC cost is £2,400 (£3,000 - £600) If his employer provides AVC Wise and he agrees to a sacrifice of £2,988 and pays £12 per year in AVCs (resulting in a total contribution of £3,000), he will still make £600 in tax savings. In addition, he will benefit from NICs savings of approximately £358 per year (£2,988 x 12% at current rates). Therefore, by participating in AVC Wise, the actual net cost to John of the £3,000 contribution will be £2,042 (£3,000 - £600 - £358).
Therefore, when compared to paying standard AVCs, participation in AVC Wise results in an annual net saving to John of £358.00 John can keep this saving or he can choose to put it into additional AVCs and make further tax and NICs savings, thus increasing the amount paid into his AVC pot.
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