There’s few things that can be more complex than the current pensions regime.
As if changes to the Lifetime Allowance, April 2016, and alterations to Pensions Input Periods wasn’t enough to contend with, those with earnings over £110,000 now need to be mindful as to what they can contribute into pension in the near future. Those with a passing interest in pensions may know that the Annual Allowance (AA), what you can pay into pension during the course of a year, has dropped from £215,000 in 2006 to £40,000 in the current tax year.
From 6th April 2016, those earning in excess of £150,000 will start to see their AA reduce by £1 for every £2 of income over the £150,000 figure, the maximum reduction being £30,000. So for those earning over £210,000 the AA will be restricted to £10,000.
The Finance Bill 2015 brings to the forefront the concept of Adjusted Income and Threshold Income to assess if individuals will be impacted upon by these changes.
Threshold income is essentially all taxable income (e.g. rental income, dividends, income from collectives, private medical benefits, earned income, etc.), less pension contributions. Importantly, any Salary Exchange made into pension post the Budget (8th July 2015) will be brought back into the calculation.
If once totalled, income remains below £110,000 then you will retain the £40,000 AA. If you are above £110,000 you need to look at your Net Adjusted Income.
Net Adjusted Income
Your net income is defined as the amounts of income on which you are charged income tax less any reliefs (e.g. various trade losses). Net income is before deducting any Personal Allowance entitlement (the maximum for 2015-16 being £10,600). To this any personal pension contributions made to most occupational or public services schemes need to be added in; as well as any employer contributions made in the tax year.
Once this calculation has been performed, if total income remains below £150,000 then the £40,000 AA is retained. Any income in excess of £150,000 means that the tapered effect outlined above (£1 for every £2 of income) starts to apply.
Defined Benefit Schemes (Final Salary)
Active members of DB schemes beware, calculating the employer contribution into pension involves assessing the pension at the beginning of the scheme year, indexing this figure, calculating the value of the pension at the end of the scheme year, deducting one from the other and then multiplying the amount by 16. It’s unlikely that an accurate figure will be available until after the calculation needs to be made, which should be done by a pensions’ professional.
So what’s the message?
If your taxable earnings are on or around £110,000 from April 2016 you need to take great care around what you are contributing into pensions. Falling foul of these rules may well result in personal liability to a tax charge. There are various legitimate planning opportunities that can be considered to reduce your taxable earnings if you are at or above the identified limits.
“Pensions simplification”, don’t you just love it?
(notably this is not simple, and we strongly recommend you seek advice if you are affected by the issues above)