19 Mar 2016
1. Radical change to contribution tax relief limits for high earners
2. Lifetime Allowance reduction 2016
3. Potential ‘flat rate’ pension contribution tax relief
1. Radical change (reduction) to contribution tax relief limits for high earners
You may be aware that in the Summer Budget the Chancellor announced changes to pensions that will affect higher earners.
Contributions after 6th April 2016 will be significantly restricted and there is a limited window of opportunity to maximise contributions in the current tax year and potential receive between 40% – 60% tax relief. Due to a quirk in the ways the rules work some individuals may have a double pension allowance for the 2015/16 years, and almost all individuals can “carry forward” unused allowances from up to three previous tax years.
From 6th April 2016 the Annual Allowance (the amount that can be contributed to a pension and receive tax relief) is reducing for those earning >£150,000. For these individuals their Annual Allowance reduces by £1 for every £2 of income they have above £150,000. Some examples are shown below:
- Income of less than £150,000 your Annual Allowance is £40,000
- Income of £170,000 your Annual Allowance is £30,000
- Income of £190,000 your Annual Allowance is £20,000
- Income of £210,000 or more your Annual Allowance is £10,000
The income is from all sources and will be adjusted if your employer makes large pension contributions.
In the example of an individual earning over £210,000, this change means £13,500 of potential tax relief could be lost.
You may have up to £180,000 of unused allowances from previous tax years, on which you will receive tax relief in the current year at your highest marginal rate. This is because you could potentially ‘carry forward’ unused allowances from the last 3 tax years and because in recently special rules were enacted which mean your Annual Allowance this tax year could be as much as £80,000.
Due to the complex nature of these rules and the implications of getting things wrong, if you intend making use of carry forward, or are earning in excess of £150,000 and wish to consider a one off contribution to make use of the current higher Annual Allowance before it reduces in April we strongly recommend you speak to us to obtain specific personal advice.
2. Lifetime Allowance Reduction 2016
From the 6th April 2016, in addition to the reduction in allowable contributions for higher earners described above the Lifetime Allowance is also reducing, down to £1 million.
This means that many individuals may need to consider opting out of pensions altogether indefinitely and elect for “Fixed Protection 2016” securing their own personal lifetime allowance at the current limit of £1.25 million. This could be the right action even for individuals with pension funds significantly below the post 6.4.16 Lifetime Allowance of £1 million, especially where they have current or deferred final salary (defined benefit) pension benefits.
The benefit of applying for Fixed Protection 2016, even when benefits are significantly below this level, is that it can always be relinquished, but if it is not applied for then it cannot be applied for retrospectively if contributions continue after 6th April 2016.
3. Potential ‘flat rate’ pension contribution tax relief
A recent consultation has just closed on Pension’s Tax Relief “Strengthening the incentive to save: A consultation on pension tax relief” which put under the spotlight how pensions are treated for the purposes of initial payments and the tax relief these receive. Recently articles in the FT and other leaks from the Treasury suggest that the tax relief on pensions is likely to be moved to a flat rate treating all tax payers the same.
Currently, basic rate tax payers (broadly those below £42,000) receive 20% tax relief on contributions they make personally under the ‘relief at source’ scheme. This also applies to those that pay no tax (earnings under personal allowance) at all as long as contributions do not exceed their annual allowance, total pensionable earnings or an overall minimum of £3,600 (these rules do not apply to those over 75).
How much tax relief is currently available?
The table below confirms the rates of tax relief potentially available depending on an individual’s earnings.
|Earnings||Rate of Tax Relief|
|>£42,385 (if a full Personal Allowance available)||20%|
|>£42,386 – £100,000||40%|
|£100,001 – £122,000||60%|
|£122,001 – £150,000||40%|
Personal contributions normally only receive 20% tax relief at source with any additional relief having to be reclaimed via a tax return or tax coding. Employers operating a “salary sacrifice” scheme can see the pension contribution increase further by virtue of the fact that it is deducted from their gross pay and thus avoiding personal National Insurance (2% or 12%) and many employers pass on some or all of its National Insurance saved (13.8%).
We will not know about these changes until 16th March 2016 which obviously leaves limited scope for planning before the tax year end. We think it unlikely that the reduction in tax relief will be immediate due to scope of this huge change but there is the risk of “anti-forestalling” rules to stop individuals “making hay while the sun shines”.
Also take into account that due to the new Pension Freedoms, for those over the age of 55 accessing their pension is significantly easier than previously possible, with withdrawals being taxed as earned income with 25% of these ordinarily being tax free. Whilst we strongly recommend individuals treat pensions as longer term savings vehicles, it is a fact that individuals over the age of 55 will have access to them, almost without restriction, as long as they pay the relevant rate of tax.
Please be aware that the above was prepared as a summary of our current understanding of rules, which are currently in draft format and are not final law. It is possible that the above may change.
There continues to be significant changes to pensions, particularly around the contributions that can be paid and the tax relief granted on these, the amount of money that can be accrued and how this can be withdrawn.
Many of the recent changes introduced with the new Pension Freedoms have very much enhanced the appeal of pensions. However restrictions on how much someone can benefit from these are on their way in the form of the reduced Lifetime Allowance for all and reducing Annual Allowance for high earners, plus the potential introduction flat rate tax relief.
The key actions if you feel you could in any way be affected by any of these changes and/or if you were considering making additional pension contributions in the short to medium term are:
- As long as you can afford the contributions and for the reasons given above we strongly recommend you consider making those contributions sooner rather than later, having first ensured these can be justified for tax relief purposes.
- Speak to a pensions professional as soon as possible about the reducing Lifetime Allowance and Fixed Protection 2016 to ensure that if appropriate you have applied for this.
If you are unsure as to whether you could be affected or not by these changes or if you want clarification of any of the points raised or if you simply want to speak to someone to review your situation please contact us at:
Telephone: 01883 332260 or Email: firstname.lastname@example.org
Depending on the nature of your enquiry if appropriate we can introduce you to our award winning sister company, Wingate Financial Planning, who provide financial planning and advice to individuals as opposed to businesses ( http://wingatefp.com )
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change. This is information is not provided as advice or a recommendation.