Pension allowance changes

Tapering the annual allowance

The annual allowance is normally £40,000 (2016-17). However, from 6 April 2016 the Government will introduce a taper to the annual allowance for those with adjusted annual incomes, including their own and employer's pension contributions, over £150,000. Under the changes, for every £2 of adjusted income over £150,000, an individual's annual allowance will be reduced by £1, down to a minimum of £10,000.

To ensure this operates as the Government intends, pension input periods will be aligned with the tax year, although transitional rules are in place to prevent retrospective taxation.

Alignment of pension input periods

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 2016-17 onwards.

These changes to pension input periods were announced in the Summer Budget 2015 and came into force with immediate effect. For the sake of fairness during the alignment process, savers may be able to receive an additional annual allowance entitlement.

Consequently, savers may be able to receive tax relief on up to £80,000 of pension contributions for 2015-16 with a maximum of £40,000 being available for the period 9 July 2015 to 5 April 2016. In addition an individual may have unused relief which may be brought forward (see case study below).

Carrying forward unused allowances

Where pension savings in any of the last three years’ pension input periods were less than the annual allowance, the ‘unused relief’ is brought forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year. Therefore in 2016-17, unused allowance may be brought forward from 2013-14, 2014-15 and 2015-16. The annual allowance was set at £50,000 in 2013-14, and was reduced to £40,000 for 2014-15 onwards.

Case Study

Andy is a self-employed electrician. In the three years prior to 2016-17 Andy has made contributions of £25,000, £25,000 and £30,000 to his pension scheme. The annual allowance in those three years was £50,000 for 2013-14 and £40,000 for 2014-15 and 2015-16. As he has not used all his annual allowance in earlier years, there will be £50,000 that he can carry forward to 2016-17.

Taking into account the 2015-16 potential allowance of up to £80,000 (dependent upon the transitional rules), this means that Andy may be able to make a contribution of up to £130,000 in 2016-17 without incurring an extra tax charge.

Please speak to us for further advice.