As we approach the end of the tax year (5 April 2016) there are a number of reasons to consider additional pension funding.
1. Tax Relief
The Government is currently reviewing the rate of tax relief available on pension contributions. For higher and additional rate taxpayers, this is almost certainly going to result in a reduction – whether to 25%, 30% or some other figure remains to be seen. An announcement in the Budget on 16 March is expected – whether this will be effective immediately, or with effect from the new tax year will be confirmed at that point.
Subject to having sufficient unused relief available, a contribution of up to 100% of earnings can be made, with tax relief granted at marginal rates accordingly.
2. Reduced Annual Allowance
For those with incomes in excess of £210,000 the Annual Allowance (the maximum pension contribution in any one tax year) will reduce from £40,000 to £10,000 – seriously affecting the amount that can be paid in going forward. This reduces on a sliding scale for those with incomes in excess of £150,000. Whilst it is still possible to carry forward unused relief (subject to availability) in future years the benefit of this will be reduced if the maximum contribution is £10,000 (from all sources).
3. Reducing Lifetime Allowance
Along with the reduction in Annual Allowance, the Lifetime Allowance (LTA) (the maximum pension fund that can be accumulated without penalty) is also reducing – from £1.25m to £1m. As when the LTA has reduced in the past, it is possible to apply for protection at the higher level. However, to protect the full £1.25m contributions have to cease with effect from 6 April 2016 – so although it is not possible to apply for the protection until Summer 2016, action needs to be taken now to maximise contributions in the current tax year.
4. 2015/2016 is special
In the interests of ”˜simplification’ (where have we heard that before???) the Chancellor announced in the Summer 2015 Budget that Pension Input Periods (PIPs) are to be aligned from April 2016. To achieve this, there are effectively two PIPs in the 2015/16 tax year. Up to £80,000 can be paid in to plans with a PIP year ending prior to 8 July 2015, with a maximum of £40,000 in the second period ending April 2016. However, the maximum that can be carried forward from the first period to the second period is £40,000 – if the full £80,000 has not been used, it cannot be claimed retrospectively.
5. Thinking of taking income from your pension in the coming years?
If so, you should consider maximising your pension contribution now. If income is accessed on a drawdown basis, the maximum permitted contribution (irrespective of earnings) is £10,000. So it makes sense to pay as much in as possible in the tax year before taking benefits.
6. Unused relief
It is only possible to carry forward unused relief for 3 years (and then only after the maximum contribution has been paid for the current year). If it is not used, it is lost. With an annual allowance of £50,000 in 2012/13, it is a valuable benefit if you have funds available.
7. Avoid 60% tax
Many individuals are not aware that for those earning between £100,000 and £121,200, they are effectively paying 60% tax on this slice of income. This is because the personal allowance is reduced by £1 for every £2 of income over £100,000. Paying a pension contribution sufficient to bring income down below £100,000 regains the full benefit of the personal allowance and avoids this punitive tax charge. Again, the ability to pay will be governed by the amount of the annual allowance and carry forward available.
8. Child Benefit
One of the changes introduced a few years ago was the Child Benefit Tax Charge. If the higher earning partner’s income is in excess of £60,000, any Child Benefit received will be clawed back in full. Between £50,000 and £60,000, £1 of Child Benefit is lost for every £100 of income. Once again, the income calculation allows for pension contributions, so the full benefit could be reclaimed by a pension contribution, or at least the impact reduced.
As with anything involving pensions, the legislation and calculations required are not straight forward – so appropriate advice should be sought before any additional contributions are made.
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Robertson Baxter is a full service whole of market Independent Financial Advice firm. We offer a Family Office approach to clients of high and ultra high net worth together with Trustees and Charities. Our holistic advice covers all areas of Pension, Investment, Protection and Estate Planning, serving clients across Yorkshire.
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