Tapered Annual Allowance – A Nightmare on Pensions Street
One year on from the launch of yet another change to pension legislation we find ourselves looking at how the tapered annual allowance has impacted high earning individuals and highlighting points to consider in the next tax year. First, lets…
Blog2nd Mar 2017
One year on from the launch of yet another change to pension legislation we find ourselves looking at how the tapered annual allowance has impacted high earning individuals and highlighting points to consider in the next tax year.
First, lets familiarise ourselves with the rules introduced for 2016/17 and how it can effect an individual’s ability to make pension contributions in a tax efficient manner.
An individual’s annual allowance of £40,000 will not be cut if their ‘threshold income’ is £110,000 or less for the tax year. An individual’s ‘threshold income’ is measured against their total income from all sources; any new salary sacrifice arrangements (started after 8 July 2015) less any individual pension contributions. When measuring ‘threshold income’, a number of things need to be considered:
- All taxable income, including investment and property income
- Any income that has been exchanged via a Salary Exchange agreement set up after 08/07/2015
- Value of employer paid benefits such as Private Medical Insurance that are liable to P11D
A word of caution when measuring ‘threshold income’, care needs to be taken as to whether personal pension contributions have been made via a net pay arrangement or relief at source.
Following the usual pattern of all things pension related it is never so straightforward. For anyone who has ‘adjusted income’ of over £150,000 in 2016/17, the normal £40,000 annual allowance reduces by £1 for every £2 of income above the threshold. For example, someone with an income of £190,000, would see their annual allowance cut to £20,000 and for those individuals with an adjusted income of £210,000 and above, their annual allowance will be reduced to a minimum of £10,000.
For ‘adjusted Income’, individuals also need to add in the value of any employer pension contributions. For example, an employee that has taxable income of £135,000 and receives £40,000 employer pension contribution will then have an ‘adjusted income’ figure of £175,000 and therefore sufferers a reduced annual allowance (£1 for every £2 of income above the £150,000 threshold) due to the new Tapered Annual Allowance rules.
There is a carry forward facility for any unused allowances in previous three tax years; however, this may cause a degree of confusion in future years. This has worked as a relatively straightforward process with people knowing they can make contributions not just using the annual allowance of the current tax year but also utilising unused allowances from the three previous tax years. As we work backwards, there was a change from 6 April 2014 from what was a £50,000 annual allowance down to the current £40,000 figure. For the new tax year (2017/18), the £50,000 value will disappear from calculations as the furthest anyone will work backwards is 2014/15. It is important to note that anyone contributing an amount over their allowed limit creates a tax liability.
Unused allowances from previous years were simply a set figure, less anything paid into pension that year; there was never a requirement to check anyone’s taxable income other than for the tax year in which the payment relates. This will now have to change and brings with it an added layer of complexity. It will therefore be vital to have an accurate taxable income figure from April 2016 onwards so that any reduction to the annual allowance is correctly calculated.
Many businesses will recognise that although the amount of people affected by these limits is relatively small, it is more than likely to be the senior management team who are impacted so may want to highlight the issue and help them receive guidance from their corporate benefit advisors or own financial advisor.
Doing nothing or claiming ignorance to potential tax charges have never really worked where HMRC is concerned, the time to check details is before or early in the new tax year. Waiting too long to check allowance calculations could mean it is too late to avoid the tax charge.
For further information or support, please contact Richard Petrie, Corporate Benefits Manager, (Richard.Petrie@aab.uk) or your usual AAB contact.