Pension Changes post Summer Budget
Important changes to pension contributions and the tax relief available
In his July Budget the Chancellor announced important changes to pension legislation, which will impact the future ability for high earners to mitigate income tax through pension contributions.
Reduction to the Annual Allowance from 6 April 2016 onwards
The annual allowance, currently £40,000, is the maximum contribution an individual can make to a UK registered pension scheme.
From April 2016 anyone whose total “adjusted income” exceeds £150,000 a year, will see their annual allowance reduce by £1 for every £2 of income over £150,000. The maximum reduction in the annual allowance is £30,000. So for anyone whose “adjusted income” exceeds £210,000 a year their annual allowance cannot be less than £10,000.
Individuals will still be able to make use of rules which allow you to “carry forward” any unused annual allowance from the previous three tax years.
Changes to Pension Input Periods
All pension arrangements have a “pension input period”, which for most schemes is the same as the tax year. The relevance of the PIP is that it is used to test the total contributions paid against the annual allowance.
Previously it has been possible to “change” the PIP in order to increase the sum that can be paid into pension in the same tax year; thereby maximising income tax relief within the annual allowance.
The Chancellor announced that from 6 April 2016 all PIPs will cover a 12 month period, aligned with the tax year. It will not be possible to amend the PIP.
The Budget detailed transitional rules from 8 July 2015. All PIPs open on 8 July 2015 ended on that same date. The subsequent PIP would start on 9 July 2015 and end on 5 April 2016.
HMRC refer to these as the “pre alignment tax year” and the “post alignment tax year”.
Annual Allowance for 2015/2016
For the “pre alignment tax year” the annual allowance is £40,000 plus any carry forward of unused allowance from the previous three tax year.
For the “post alignment tax year” the annual allowance is also £40,000 plus any carry forward of unused allowance from the previous three tax years.
It is a case of the “early bird catching the worm”, as the new rules reward any individual who promptly paid their maximum contribution of £40,000 to their pension between the start of the tax year, and the date of the Budget (6 April to 8 July 2015). They now have another bite at the cherry and, provided they have sufficient income, can pay a further £40,000 into pension before 5 April 2016.
The ability to carry forward any unused annual allowance, from the previous tax years, will continue. However to be eligible the individual must have used their annual allowance in the current tax year; and have been a member of a registered UK pension for the tax years in question.
Reduction to the Lifetime Allowance
George Osbourne also confirmed that the Lifetime Allowance will further reduce, to £1m, from April 2016.
If your total pension fund value is likely to exceed £1m it will be possible to apply to HMRC for some form of protection against a tax charge being levied on the excess value up to £1.25m when you come to draw benefits.
It is important to note that this article details the position for an individual who is in good health, and has not yet accessed their pension benefits using flexible access rules.
The new legislation also awaits Royal Assent and so could change.
When structuring your financial affairs you should seek independent legal and financial planning advice. If you would like to discuss your options in more detail, please contact OCM Wealth Management on 0845 338 1971.