Pensions issues to watch out for as new tax year begins

Revalued to today, any additional growth in the scheme could pay out a further 25 per cent. However, April’s LTA increase means that some will get a lower protected tax-free cash sum than they would have done before the rise. This is also an issue for those with protected LTAs of £1.5m or less, because they would be entitled to a lower amount of additional growth than those without. See Box 1

It should be remembered that for those with a standalone lump sum, where the entitlement to tax-free cash exceeded the fund value at A-day and no further payments have been made, the LTA has no impact on this entitlement. This means that whatever the allowance is at the point they access these benefits, the cash remains entirely tax-free – provided they have available LTA to pay it.

Carry forward and the TAA

We can’t talk about the change in the tax year without commenting on the availability of carry forward. This is especially important to those that are impacted by the tapered annual allowance. 

We are entering the fourth year of the TAA and it is becoming an increasing burden on pension scheme members, their financial advisers and accountants – so ensure that the calculations are accurate. This is also the first year where someone could have been subject to the TAA for all the years from which they could possibly use carry forward from. 

We have also just lost access to the special split tax year, wherein pension input periods were aligned to tax years. For many, this increased the amount of carry forward available, an advantage that will now not be available.

The TAA is impacted by non-pension-related taxation changes, because the test looks at the net income of a pension scheme member as defined by income tax and not pension legislation. 

This tax year has brought another incremental change, relating to the way that interest on mortgages is dealt with for buy-to-let properties. Historically, this interest was a deductible expense when calculating rental profit, but since 2016-17 it has moved from an expense to a tax relief. This means that the amount of profit applicable to the threshold and adjusted income tests has increased for those impacted. There isn’t anything that can be done about this, but it is something to be aware of.

Personal allowance

The personal allowance has risen to £12,500, which will have an impact on both low and high earners contributing to a pension scheme.