Back for good

Back for good

The announcement in the 2009 Budget of pension tax relief restrictions for higher earners and the introduction of the anti-forestalling rules saw an unwelcome complication and disincentive to save. Almost immediately reversed in the first Budget of the new coalition in 2010, the issue of higher- and additional-rate pension tax relief was parked – until now.

With the reintroduction of restrictions on tax relief for higher earners from April 2016, advisers have a few short months to ensure higher earners make the most of the current rules, accepting this is based on draft legislation which could change.

The ‘Pension Allowance’ Most people have two contribution allowances to consider, not one. First, 100 per cent of relevant UK earnings (or £3,600 if greater).

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This is the maximum personal, employee or third party pension contribution a relevant UK individual can make on which they will receive tax relief. Contributions are measured in the tax year they are made and earnings usually in the tax year they are received.

Second, there is the annual allowance, currently set at £40,000. This is the maximum pension input amount which can be accrued without incurring an annual allowance charge. It covers all contributions, including employer contributions, as well as defined benefit accrual.

But with effect from 6 April 2015 the money purchase annual allowance (MPAA) was introduced.

This is for those who have flexibly accessed their pensions. This sits within the annual allowance, so where an individual has triggered the MPAA they will have, for example, a £40,000 annual allowance of which £10,000 could be paid to money purchase pension schemes.

Budget changes – the tapered annual allowance

From 6 April 2016 the annual allowance for the tax year will be reduced by £1 for every £2 that adjusted income is over £150,000 in that tax year. The tapered annual allowance will not apply to anyone with threshold income of £110,000 or less in the tax year. The maximum reduction is £30,000 so anyone with a threshold income above £110,000 and an adjusted income of £210,000 or above will have a £10,000 annual allowance.

As shown in Box 1 and Box 2 adjusted income is, broadly, all taxable income, plus pension contributions paid through net pay (which would otherwise reduce taxable income), plus employer contributions, plus defined benefit and cash balance pension input amounts, minus employee contributions to defined benefit and cash balance pension schemes.

Threshold income is, again broadly, all taxable income plus any salary sacrificed (including flexible remuneration) for pension contributions on or after 9 July 2015 minus any personal/employee/third party pension contribution.

Carry forward will continue to apply based on the annual allowance or tapered annual allowance of the tax year from which the individual is carrying forward. For example, if adjusted income in 2016/17 is £170,000, the maximum carry forward from 2016/17 to a subsequent tax year will be £30,000.

Salary sacrifice and flexible remuneration

When an individual is calculating their threshold income they need to add back in any salary sacrifice or bonus waiver for ‘relevant pension provision’ made on or after 9 July 2015 (one-off bonus waiver will only be applicable to 2016/17 onwards).

This includes ‘flexible remuneration arrangements’, that is, when an individual and employer agree that pension is to be provided instead of employment income. Relevant pension provision is an increase in pension provision or new pension provision.