Summer Budget 2015
Tax Relief on Pension Contributions
Background
During the 2015 Summer Budget, the Chancellor announced further changes to tax relief on pension contributions, potentially affecting all taxpayers making pension contributions. Currently, all qualifying pension contributions receive tax relief as the Government contributes £20 for every £80 paid by an individual. Higher (40%) and Additional (45%) income tax payers receive further tax relief for pension contributions through their tax return.
Anyone considering making pension contributions in the near future should be aware that tax relief could be restricted from April 2016. This is a complex area where specialist advice is strongly recommended. If you want any further information we can put you in touch with one of our advisors.
Annual Allowance Taper
The maximum contribution that can receive tax relief is subject to a number of restrictions, such as the Annual Allowance which is currently £40,000. This means that, prior to the Summer Budget the most an individual can contribute is £40,000 in a pension input period (“PIP”), plus unused amounts from 3 previous years as long as the individual was a member of a pension scheme. Every pension arrangement has its own PIP, which is the length of time used to measure your pension contributions, usually 12 months but it can be shorter or longer.
From 6 April 2016 the Annual Allowance for individuals with income plus their pension contributions of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000 is tapered. All pension contributions, including those made by your employers, are added to your income to check if the total exceeds £150,000. The Annual Allowance is reduced by £1 for every £2 the limit is exceeded, subject to a maximum reduction of £30,000.
For example, under the new rules if an individual makes a pension contribution of £40,000 and their salary plus bonus is £130,000 then the total is £170,000 and both the £150,000 and £110,000 limits are breached. The Annual Allowance is reduced by £10,000, being £170,000 less £150,000 divided by 2.
2015/16 Pension Contributions
As part of the changes, PIPs will be aligned with the tax year. Any PIP in existence ended on 8 July 2015, the date of the Summer Budget, and a new one commenced to 5 April 2016. The PIPs running up to 8 July 2015 and to 5 April 2016 will each receive a deemed £40,000 Annual Allowance, with unused amounts carried forward but subject to a cap of £40,000. In addition, any unused annual allowance from the previous 3 years can be added to these amounts in the normal way. This means that, potentially, an individual who made a £40,000 contribution in May 2015 can make another £40,000 contribution before April 2016 and both contributions could receive tax relief.
Employer Contributions
Contributions paid by employers are included in the Annual Allowance. Owner managed businesses where the owners are higher earners may prefer to make contributions through their company rather than personally, in order that the company receives a corporation tax deduction even if they don’t receive higher rate relief personally.
Alternatively, pension contributions should be planned for a year where your income is lower. Despite the new restrictions, we recommend considering pension contributions whilst any relief is available for higher earners.
This is a general overview of draft legislation which may change before it receives Royal Assent and becomes law. We strongly advise anyone considering making significant pension contributions to take independent financial advice.
If you are concerned about your potential tax liability generally please contact our Tax Director, Jenny Marks.
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