How the pension tax relief system is changing
During the Summer 2015 Budget, Chancellor George Osborne announced that pensions tax relief for high earners would be cut with the introduction of a tapered annual allowance from 6 April 2016.
The amount higher earners can pay annually into their pension and still qualify for tax relief will be cut from £40,000, tapering this to £10,000 for those making £150,000 a year or more. This relates to the total amount that you can pay into a pension over your life and qualify for tax relief.
For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.
Replacing complex rules
Although this measure may not directly apply to you, in advance of its implementation, a change is to be made to align ‘pension input periods’ with the tax year, replacing the complex rules which have applied until now. This change could affect many individuals, and, therefore, transitional rules will operate during tax year 2015/16 to protect savers who might otherwise be affected by the alignment of their pension input periods. The impact of these transitional changes is that it may provide a one-off additional opportunity during tax year 2015/16 to maximise pension saving tax relief.
Excess tax charge
Individuals who make pension contributions into more than one scheme need to take particular care not to exceed the annual allowance of £40,000, otherwise there is an excess tax charge. This annual maximum applies whether the pension savings are made by the individual or an employer such as the individual’s own owner-managed company. Pension contributions for each scheme are measured by a pension input period. A pension input period, although usually of 12 months’ duration, did not have to align with the tax year.
However, all pension input periods ending within the tax year should be considered to assess whether the annual allowance has been exceeded. As different schemes can have different pension input periods, careful planning may be required.
Qualifying pension contributions
The main aim of the transitional rules is to ensure that savers are not adversely affected during the alignment process because of the timing of their original pension input periods. As a result, individuals may be able to have qualifying pension contributions of up to £80,000 rather than £40,000 in tax year 2015/16. The precise position for each individual will be dependent on the type of pension scheme, the pension input periods of each scheme and the timing of contributions.
Pension input periods
All pension input periods open on 8 July 2015 closed on that date. The period 6 April 2015 to 8 July 2015 is to be known as the ‘pre-alignment tax year’. There will then be a second pension input period running from 9 July 2015 to 5 April 2016. This will be known as the ‘post-alignment tax year’. All subsequent pension input periods will be concurrent with the tax year from 2016/17 onwards.
All individuals will have an annual allowance of £80,000 for the pre-alignment tax year. Where this amount has not been used in the pre-alignment tax year, it will be carried forward to the post-alignment tax year, subject to a maximum of £40,000. In addition, any unused annual allowance from the previous three years can be added to these amounts if required.
Have you made sure that any opportunities will be fully maximised?
As clients of ours, your individual position will vary depending upon your current pension arrangements and circumstances. We would welcome the opportunity to review your current situation before the end of tax year 2015/16 to ensure that any opportunities are maximised before 5 April 2016, and consideration is made as to whether the tapered annual allowance rules could apply from 6 April 2016. If you would like to discuss your retirement plans, please contact Admiral Wealth Management on 01472 357035 or email firstname.lastname@example.org – we look forward to hearing from you.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.