Reduction in annual allowable amount to £10,000
Imminent changes are about to limit tax relief for contributions to personal pension schemes, from £40,000 to only £10,000 per annum in many cases.
From 6th April 2016 where both of the following income limits are exceeded, there will be a reduction in the annual allowance:
- Threshold income for the year exceeds £110,000 and
- Adjusted income exceeds £150,000
Threshold income means all income (investment and earned), less certain reliefs including the “grossed up” amount of pension contributions paid by the individual.
Adjusted income means threshold income plus all pension contributions.
Individuals with “adjusted income” of £210,000 or more may contribute no more than £10,000 per annum into a pension scheme and obtain tax relief. Individuals with adjusted income between £150,000 and £210,000 will have their annual allowance scaled back on a £1 for £2 basis.
Anyone with income in excess of £150,000 still wishing to build up a pension fund should consider now how much they may be permitted to pay in contributions before 6th April 2016. Individuals who pay contributions on a regular basis should review whether this needs to be restricted to as low as £10,000 per annum from 6th April 2106 bearing in mind the changes mentioned above. Contributions made in excess of the relevant limit will be tax inefficient.
Until 5th April 2016 an individual with sufficient earnings may pay up to £40,000 (gross) each year into a personal pension scheme. Amounts in excess of £40,000 may be permissible to the extent that the individual has paid less than £40,000 in any of the three previous tax years. In establishing whether the £40,000 allowance has been used up, amounts paid by the employer should also be included. The amounts actually paid by an employee or self-employed person will be net of 20% tax, so a cash payment of £16,000 will count as a gross contribution of £20,000.
Possible removal of higher rate relief
There have been rumours that the Chancellor in his Budget on 16th March 2016 may reduce higher rate tax relief on pension contributions. If this were to happen, the change could be effective immediately, so it would be safer to pay contributions before 16th March.
Restriction if already drawing pension benefits
Some individuals continue to contribute to pension schemes even after they have started to draw benefits. If an individual is in flexible draw down of benefits, he or she can contribute no more than £10,000 into the scheme.
Pension input period changes – possibility of up to £80,000 annual allowance in 2015/16
Tax relief for personal pension contributions has previously been given by reference to payments made in the Pension Input Period (PIP) which ends in the tax year. To simplify matters, PIPs are to be aligned with the tax years starting with 2015/16. This change is effective from 8th July 2015 resulting in two “mini tax years” for this purpose: one ending on 8th July 2015 and the other on 5th April 2016. To the extent that contributions were paid between 6th April and 8th July 2015 they increase the annual limit for 2015/16. So if £5,000 had been paid in the earlier period, that would allow a total of £45,000 to be made for 2015/16.
Elect to protect Lifetime limit at £1.25m?
Where the value of a pension scheme exceeds the relevant lifetime allowance at a “crystallisation event”, there is a tax charge levied on the excess: 55% on capital sums and 25% on income. Crystallisation events occur when you start to draw a pension benefit.
The current lifetime limit is £1.25m (unless you have already elected to retain a previous higher limit). From 6th April 2016 the standard lifetime limit reduces to £1m.
Individuals who have not already elected to retain a higher limit, should carefully consider whether it would be better now:
- to elect to preserve the £1.25m limit – although no further contributions would be permitted after 5th April 2016, or
- not to elect, accept the lower lifetime limit of £1m, but continue to make contributions.
Action to be taken
We suggest that individuals should immediately consider their options but before taking any action, seek professional advice as the rules concerning pensions can be quite complex.