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Maximising tax relief on your pension

There has been much speculation about restricting tax relief on pension contributions for top rate taxpayers. This has now been addressed by applying a significant reduction to the annual amount that they will be able to pay into a pension.

Tapered Annual Allowance

With effect from 6 April 2016, the Annual Allowance of £40,000 will be reduced by £1 for every £2 of income over £150,000 per annum, up to a maximum reduction of £30,000. This means individuals with ‘adjusted income’ in excess of £210,000 will only have an Annual Allowance of £10,000.

Importantly, the income definition of ‘adjusted income’ will include any employer pension contributions. This means that the tapered allowance cannot be manipulated by reducing income via salary sacrifice.

Whilst the annual contributions will be capped at this low level in future, there is still an opportunity for people caught by this change to maximise contributions with the use of two particular measures, which need further explanation:

Making use of the carry forward allowances

All individuals are able to carry forward any amount of their Annual Allowance that remains unused for up to three full tax years. Whilst their levels of carry forward accrual will be significantly limited in the future, high earners who currently have carry forward relief should consider using it before it expires.

The Annual Allowances for the last three years were:

2012/2013         £50,000     
2013/2014  £50,000 
2014/2015  £40,000

Anyone who has not maximised their contributions across these back years has a window of opportunity to make use of accrued carry forward and receive additional rate relief before the end of the current tax year. If the carry forward allowance for the above tax years is not used it will start reducing as each year falls off and will be lost completely by 6 April 2019.

Pension Input Period alignment

A further change which will considerably simplify the Annual Allowance is the alignment of Pension Input Periods (PIP) to the tax year. A PIP is the period over which an individual’s pension savings are tested against the Annual Allowance. It has previously not always been aligned to the tax year but all existing PIPs open on 8 July 2015 automatically ended on this date. A new PIP then opened on 9 July and will run to 5 April 2016. Future PIPs will then be aligned with tax years.

For those who have made contributions in the PIP ending 8 July 2015, the Annual Allowance for 2015/16 could be as much as £80,000. This is the result of a technical fix designed to assist savers whose PIPs were not tax year aligned and had therefore made contributions some of which were to be assessed against the 2016/17 allowance. The £80,000 allowance is split between contributions paid in the two PIPs. Any allowance not used up to 8 July 2015 can be carried forward to the post 8 July PIP, but up to a maximum of £40,000.

This provides a one-off opportunity to those who have paid contributions in the pre 8 July 2015 PIP and have sufficient earnings to use against an additional contribution in the current tax year. The table below summarises the amount of contribution which could be paid based upon different levels of contribution paid before July 2015.

Contributions paid to
8 July 2015 
Annual Allowance
9 July 2015 – 5 April 2016
£0 £40,000
£20,000 £40,000
£40,000 £40,000

£60,000

£20,000
£80,000 £0

The changes show there are tax pension opportunities still out there.

Every time we see pension announcements referring to simplification, the detail is often far from simple! The message is that everyone’s circumstances are different and we would be delighted to help you through the complexities and to maximise your pension tax reliefs.

If you would like further information please contact Gill Tallon or one of your usual Mercer & Hole contacts.

 

 

 

Date: 8th July, 2015
Author: Gill Tallon

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