What is happening?
Since 2014/15 the annual allowance has been £40,000 per person regardless of earnings, although tax relief would only be available on contributions up to earnings. In the previous two tax years the allowance was £50,000 and prior to that it was much higher.
In a further measure to tackle the cost of pension tax relief the government announced in the July 2015 Budget that the annual allowance for those earning over £150,000 per annum will be tapered from 6th April 2016, down to a minimum of £10,000 per annum for those earning £210,000 per annum or more.
Will you be affected?
The £150,000 threshold is based on ‘adjusted income’ which includes, amongst other things, salary, bonus, dividends and some pension contributions. Therefore even if income is prima facie below £150,000 the inclusion of pension contributions may result in the taper applying.
The calculation is only made for those with income above £110,000 per annum (the ‘threshold income’) so if your income is below that level the annual allowance will remain at £40,000 per annum regardless of pension contributions.
Anyone with income over £110,000 will need to review whether their ‘adjusted income’ exceeds £150,000 and if so the annual allowance taper will apply.
How will tapering work?
The annual allowance will reduce by £1 for every £2 of earnings above the £150,000 adjusted income threshold. For example, if adjusted income is £180,000 the annual allowance will reduce by £15,000 to £25,000 for that tax year.
The annual allowance will not reduce below £10,000 and this limit will apply to anyone earning £210,000 or more in adjusted income.
If the tapered allowance applies this year, will it apply in future years?
The taper calculation is applied annually and therefore simply because it applies in one tax year, it does not automatically apply in subsequent tax years. The calculation will need to be made each tax year.
What are your options?
Depending on the level of pension contributions made during the current and previous three tax years, you may have scope to make additional pension contributions before the end of this current tax year. Carry forward provisions allow any unused annual allowance from the three previous tax years to be used once the current tax year’s allowance has been fully funded. Tax relief, however, can only be secured on contributions up to earnings. To add to the complexity, transitional rules apply for the 2015/16 tax year which provide scope to potentially make contributions up to £80,000 but only if at least £40,000 was contributed before 8 July 2015.
The Lifetime Allowance, which is the cap on overall pension benefits, should also be considered. The Lifetime Allowance is currently £1.25million, reducing to £1million from April 2016. We will shortly be releasing a separate article on this.
From the 6th April if your adjusted income is above the taper threshold your scope to make pension contributions, or to receive employer contributions, will be restricted. There are other options to make tax efficient long term savings such as ISAs, Venture Capital Trusts and Enterprise Investment Schemes and these may be appropriate depending on circumstances.
What should you do?
If you earn in excess of £110,000 per annum you should seek the advice of a qualified financial planner, ideally a pension specialist, to advise you on the most appropriate course of action for your personal position and objectives.
Such advice should be sought well in advance of the end of the tax year to ensure current planning opportunities can be explored and if appropriate implemented whilst the scope remains.
At Fiducia we have a very experienced team, including three pension specialists, who would be happy to discuss your options. Please do contact us if you would like to have a preliminary discussion as to how we may be able to assist.
