I'm sure you will agree that 2015 yielded a tremendous amount of changes to pension planning!
Unbelievably, most of the changes were positive and will benefit a significant number of people for a myriad of different reasons. However it doesn’t end there. It never does. The 5th April (and possibly even the 16th March) are going to see many more changes come into effect, and some of them will adversely affect serious pension savers.
For a large number of you, the changes in April probably won't affect you as they mainly affect additional rate (45%) tax payers and very high earners, but if the rumours are to be believed then the budget on the 16th March might bring about changes firmly aimed at higher rate (40%) tax payers. So for any of you that are thinking about making single premium pension contributions and those wanting to utilise unused annual allowance from previous years, I would not put it off!
This is perhaps one of the most important news articles I think I have even written! So please read this now from start to finish. I apologise that some of it may be a little ‘jargon-filled’, but if you are a higher or additional rate tax payer, you must, must, read this and if you need to ask questions, drop me an email or give me a call!
PENSIONS :: Tax relief under threat?
As I alluded to in my introduction, the next Budget is on the 16th March.
It is widely anticipated that there will be an announcement regarding a change to tax relief on pension contributions which could see the scrapping of higher rate tax relief, or perhaps further changes to the annual allowance.
The truth is we don't know for certain, however, what we DO know is auto enrolment is well and truly underway, and millions more people have, or will in the very near future, be enrolled into pension schemes. The opt out rates are far lower than anyone expected, which means that the levels of tax relief being handed out to all these new pension savers has to come from somewhere! My guess, and it is only a guess, is it will be funded by limiting the amount of tax relief currently being enjoyed by higher earners.
Therefore, it might be that the 16th March should be the relevant date to aim for if you are planning on making a lump sum pension contribution in this tax year and are worried about the possible removal of higher rate tax relief.
PENSIONS :: Additional annual allowance
Some people will be unaware that they have been given the opportunity to have two bites of the proverbial 'annual allowance cherry' due to the alignment of pension input periods. Transitional arrangements have meant that some people will potentially have up to double the normal level of annual allowance in the 2015/2016 tax year.
One of the unexpected announcements in the summer budget meant that an additional annual pension allowance of £40,000 for the 2015/16 tax year is available for a number of clients. The net result is that for those affected by the change in pension input periods (PIPs) they may be able to contribute up to £80,000 in the current tax year and claim tax relief at up to 45%, the level of additional rate income tax.
In simple terms, all pension input periods that were open on the 8th July were closed, and a new pension input period ending on the 5th April was opened with a fresh allowance of up to £40,000.
This process has had the effect of aligning ALL pension input periods to the 5th April, in line with the tax year.
PENSIONS :: Carry forward unused annual allowance
After the 5th April, the opportunity to carry forward unused relief from 2012/2013 will also end as you are only able to carry forward unused annual allowance from the previous three tax years.
This is a one-off opportunity for high earners to maximise any unused pension allowance for the three preceding tax years attracting tax relief at their highest marginal rate.
The maximum possible contribution you could make before 5 April 2016 would be £180,000 gross, (£50,000 for tax years 2012/13 and 2013/14, and £40,000 allowance for tax years 2014/15 and 2015/16). For an additional rate tax payer, the net cost would only equate to £99,000.
However, you need to be aware that pension contributions in any tax year cannot exceed relevant UK earnings for that same period.
You should also consider the lifetime allowance which currently stands at £1.25million, but which will fall to £1m from 6 April 2016.
Fixed and Individual Protection for the latter point is worthy of a newsletter in it’s own right, and if we are not already talking to you about this, then please do drop me a line.
PENSIONS :: Reductions in the annual allowance
April also sees the introduction of tapering of the annual allowance for high earners. People earning over £150,000 of ‘adjusted income’ after April will see a reduction in their £40,000 annual allowance of £1 for every £2 over that level until it hits a floor of £10,000. A test on 'adjusted income' and 'threshold income' needs to be carried out, but all I will say is, if you think this will affect you then it is best to talk to me as it is quite complicated to explain in a short article.
For many clients this could result in an annual allowance tax charge that is very difficult to avoid, especially for those in occupational pension schemes like Doctors.
This gives many people a last chance opportunity to maximise their tax relief on pension contributions.
I think the key here for those affected by these changes, is to act now!
________________________________________Back to articles