Before 31 July, you should receive two tax credits documents from HMRC. The first of these is the annual review form on which you have to check that your ‘personal circumstances’ (ie eligibility to claim) have not changed. To be eligible, you need to be in paid work and responsible for children or young people. No change, no action. Then there is the annual declaration where you tell HMRC about your income for 2008/09.

By completing and signing this you are also making a claim for tax credits for 2009/10. (Even if you are not entitled to tax credits for 2009/10 you need to complete a declaration if you submitted a claim for tax credits in 2008/09.

In general, the higher your income, the more your claim will be reduced. However, paying into a pension increases your tax credits by reducing your income. For example, income over £6,420 reduces entitlement to tax credits at the rate of 39p per extra £1 of income. A pension payment of £8,000 net (£10,000 gross) will increase tax credits paid by £3,900 (39%). As a basic rate taxpayer you receive 20% tax relief on your pension contribution. Over that rate, for every £1 that your income has been reduced, you receive 39p of tax credits. With a combination of tax relief and tax credits, this can mean a tax deduction of up to 98% (20% + 39% + 39%) for a pension contribution.

Of course tax is not the only consideration. There are pros and cons to paying an extra pension contribution. Please come and talk to us about the full implications of extra pension contributions and your 31 July tax credit renewal forms.

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