In the Summer Budget, George Osborne announced multiple changes to pension rules including reductions to the annual and lifetime allowances.
The overhaul forms part of the Government’s plans to taper tax relief for additional rate earners. As part of the changes, anyone earning £150,000 or more a year will see their annual allowance tapered down to a minimum of £10,000 from its current £40,000 level. However to bring in this tapering, HM Revenue and Customs has stated it is necessary to align pension input periods with the tax year. A pension input period is the period over which the amount of pension saving (pension input amount) under an arrangement is measured. This normally runs tax year to tax year but it may be different.
All pension input periods will be reset on 9 July 2015 to only run in line with the tax year from the beginning of 2016/17. These transitional rules mean you could still contribute more than £40,000 this tax year and get tax relief at your highest marginal rate.
In order to effect these changes, the 2015-16 tax year will be split into two mini tax years for the purpose of annual allowance, the “pre-alignment tax year” and the “post-alignment tax year”.
During the first ‘mini’ pre-alignment tax year, individuals have a £80,000 annual allowance (plus any carry forward from 14/15, 13/14, 12/13) for all their pension savings in all pension input periods ending on or after 6th April 2015 and on or before 8th July 2015.
During the second post-alignment tax year, savings from 9th July to 5th April will have a nil annual allowance, but you can use any unused annual allowance from the pre-alignment tax year up to a maximum of £40,000. Carry forward will also remain for those who are entitled to it. The £80,000 applicable to this tax year must be used before previous tax years just as normal and it will count as a single annual allowance for the purposes of carry forward in the future, but you cannot carry forward more that £40,000 from this tax year to future years should the whole allowance not be used.
So what does all this mean?
However, investors have been warned to make careful calculations when declaring their exact earnings and working out how much annual allowance they have. The income definition for tapered allowance is not the same as taxable income, as it includes the value of pension savings. This is a new measure known as “adjusted income”. Therefore this could apply to individuals with earnings of £110,000 if they are paying the full £40,000 AA. For those earning below £110,000, there is no impact even if their ‘adjusted income’ as described above would take them over £150,000. This is to be known as the threshold income.
Furthermore, individuals who have flexibly accessed pensions saving are subject to the Money Purchase Annual Allowance (MPAA). The maximum for the pre-alignment tax year is £20,000. If this isn’t fully used in the pre-alignment tax year then up to £10,000 can be carried over into the post-alignment tax year.
MPAA rules only apply to money purchase contributions and any final salary accrual can use the full annual allowance, less any money purchase contributions up to the maximum allowable.
It is estimated that more than 240,000 high earners could face unexpected tax charges following the introduction of these new regulations, particularly those with variable earnings where it may not be as straight forward to calculate whether they have gone over their allowance or not.
To find out whether you are eligible to make further pension contributions this tax year, please contact your Finura Partners adviser.
*assuming 45% tax rate
(Sources: http://www.bestinvest.co.uk/sipps/pension-input-period, http://citywire.co.uk/new-model-adviser/news/summer-budget-tax-relief-taper-plans-hit-pension-input-periods/a825515, http://www.pruadviser.co.uk/content/knowledge/technical-centre/consultations-budget-autumn-statement/summer-budget-2015/transitional-provisions/ and http://citywire.co.uk/money/pension-savers-need-to-get-their-sums-right-or-face-tax-bill/a831962?ref=citywire-money-latest-news-list)
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