Pensions annual tax relief taper

wanman

From April 2016 I understand the pension contribution tax relief for high earners is going to change, so that the annual allowance tapers from £40k on earnings up to £110k, down to £10k if earnings are above £150k. Earnings in this case include any employers contributions to pensions

I now find I am in the fortunate position that in 2016/7 I am likely to receive a bonus that will push my earnings from below £100k to over £150k, just for one year. This will impact me both by eliminating my personal allowance as my earnings exceed £120k and also removing possible offset through pension contributions.

How will this new taper work in practice? For example, my employer+employee contributions into the company DC are over £20k a year and my contributions are currently taken as salary sacrifice, so will the company be expected to change this so the contributions taken post tax? Or will I simply get a large tax bill at the end of the year?

I have unused annual allowances from previous years. Can I use these? How do I do this? Is there something I have to tell HMRC to allocate some of the pension contributions (eg anything over £10k) to previous years? I believe I can use up allowances going back three years. Are these used in order - for example if I want to use a previous allowance does it automatically go to any spare from 3 years ago, or will it go by default against spare allowance from 2015/16? Again how do I notify HMRC about what I want to do.

Thank you for any suggestions.

bigadaj

You should be able to use carry forward for three years, normally the orders year is counted first.

There is a double £40k limit for this year meaning you can put up to £80k in with full tax relief, though won't help for next year and doesn't appear any more than the balance from £40k can be carried forward.

Sounds like you should have enough carry forward to get you back below £100 k and keep,your personal allowance, though still paying a fair bit of tax at 40%.

You just need to keep records as far as I'm aware rather than make an outright declaration to hmrc. You can always ring them up to chat it through, give them a call at 8.00 or even before if you don't want to be put in a queue for hours.

Paul_Herring

bigadaj wrote: »

There is a double £40k limit for this year meaning you can put up to £80k in with full tax relief

Not entirely accurate. It's £80K minus any contributions between April 5 and July 8 to a maximum of £40K subsequently.

http://talkingpensionsblog.gateleyplc.com/2015/09/18/tax-relief-on-pension-contributions-an-unexpected-window-of-opportunity/

neilvw

April 6

Paul_Herring

Erm - oops.

bigadaj

Paul_Herring wrote: »

Erm - oops.

Petard hoisted?

Understand your clarification but what I stated wasn't wrong, just could be open to misinterpretation.

In the case of the OP then it would appear to have a partial benefit for the OP were his earnings to have been applicable to this tax year.

I've not seen anything definitive about how this applies to carry forward of unused allowance, and whether this is still £40k for the whole year, or just the post July element. It was put forward so hurriedly that this and other issues seem not to have been thought about and were being hurriedly addressed retrospectively.

Spidernick

wanman wrote: »

From April 2016 I understand the pension contribution tax relief for high earners is going to change, so that the annual allowance tapers from £40k on earnings up to £110k, down to £10k if earnings are above £150k. Earnings in this case include any employers contributions to pensions.

Are you sure about your figures? My understanding was that the £40K annual allowance will only be tapered down by £1 for every £2 over £150K, not £110K, so that the £10K limit is reached at £210K, not £150K (and it's a lot more complicated to taper down by £30K with just £40K of extra income from £110K to £150K).

Given that nobody else has mentioned this yet, I began to doubt myself, but I'm fairly certain that my figures are correct and yours are not, so you have much less of an issue I would say.

wanman

This is from the HMRC site

"To provide certainty for individuals with lower salaries who may have one off spikes in their employer pension contributions, a net income threshold of £110,000 will apply. If the individual’s net income is no more than £110,000 they will not normally be subject to the tapered annual allowance. However, anti-avoidance rules will apply so that any salary sacrifice set up on or after 9 July 2015 will be included in the threshold definition. The rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000"

wanman

I'm not sure I understand what the quote I stated above actually means. There is another paragraph on the same HMRC page stating


"Legislation in Summer Finance Bill 2015 introduces a tapered reduction in the annual allowance from 6 April 2016, for those with an ‘adjusted income’ of over £150,000.

The ‘adjusted income’ definition adds-back any pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions."

Further down I see the statement that it applies above £150k

"The rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000"

Seems a little unclear - if not directly contradictory

HappyHarry

It is to with people trying to avoid the tapering by using salary sacrifice.

If total income plus employer pension contribution is less than £150000 then you are not affected.

High earners often have their employer make the maximum pension contributions using salary sacrifice, to save on tax and NIC.

The reason why the £110000 rule is there is that employers pension contributions by way of salary sacrifice can be £40000 and fit within the annual allowance.

For example, someone with an income of £130000 and employer pension contributions of £15000 will not be affected.

Someone with an income of £130000 and employer contributions of £30000 will be affected.

neilvw

bigadaj wrote: »

I've not seen anything definitive about how this applies to carry forward of unused allowance, and whether this is still £40k for the whole year, or just the post July element. It was put forward so hurriedly that this and other issues seem not to have been thought about and were being hurriedly addressed retrospectively.

I think it's all been thought through, it's just quite complicated and hard to get ones head around.

All pension input periods open on 8 July 2015 are closed on that date, with the next pension input period running from 9 July 2015 to 5 April 2016. All subsequent pension input periods will be concurrent with the tax year from 2016 to 2017 onwards.

To prevent retrospective taxation, individuals will have an £80,000 annual allowance for 2015 to 2016, but subject to a £40,000 allowance for savings from 9 July 2015 to 5 April 2016. To achieve this, the 2015 to 2016 tax year will be split into two notional periods, 6 April 2015 to 8 July 2015, the ‘pre-alignment tax year’ and 9 July 2015 to 5 April 2016, the ‘post-alignment tax year’. All individuals will have an annual allowance of £80,000 for the ‘pre-alignment tax year’. Where this amount has not been used in the ‘pre-alignment tax year’, it will be carried forward to the post-alignment tax year, subject to a maximum of £40,000. In addition, any unused annual allowance from the previous 3 years can be added to these amounts in the normal way.

https://www.gov.uk/government/publications/pensions-tapered-annual-allowance/pensions-tapered-annual-allowance

So there's an allowance of £80,000 from 6/4/15 to 8/7/15. If not all of that is used, any unused portion (to a maximum of £40,000) can be carried forward to the 9/7/15 to 5/4/16 period.

This article goes into more detail and explains what happens with carry-forward FROM 2015/16:

Carry Forward
Carry forward will continue to apply as currently. However special rules will apply for the 2015-16 tax year, due to the splitting of this into two mini tax years. The two mini tax years will be treated as one tax year for the purpose of calculating which years unused annual allowance can be carried forward.

For the pre-alignment tax year, carry forward will therefore be available for any unused annual allowance from 12/13, 13/14, 14/15.

For the post-alignment tax year, carry forward will be available for any unused annual allowance from these same tax years, where it hasn't been used up already by the pre-alignment tax year, plus the limited carry forward (up to £40,000) from the pre-alignment tax year.

For the three tax years after 2015-16, carry forward will be available as follows:

2016-17: 2013/14, 2014/15 and the pre-alignment tax year
2017-18: 2014/15, the pre-alignment tax year and 2016/17
2018-19: pre-alignment tax year, 2016/17, 2017/18

http://www.pruadviser.co.uk/content/knowledge/technical-centre/consultations-budget-autumn-statement/summer-budget-2015/transitional-provisions/#

Aligning pension input periods with the tax year from 2016/17 is a welcome simplification (albeit only introduced because of the £150,000 taper), but my goodness there is complexity in the transitional arrangements.

And a bit more from the Govt website:

Where an individual is subject to the money purchase annual allowance, the alternative annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. The carry forward of unused annual allowance will continue to be available, but the amount available will be based on the unused tapered annual allowance.