The recent Budget delivered mixed news for clients saving for retirement.
Most people effectively have a new £40,000 allowance for pension contributions running from 9 July 2015 to 5 April 2016.
Those who thought they had used their full allowance this tax year might now be able to invest more and receive up to 45% tax relief (for those earning more than £150,000 in this tax year or 40% for higher rate tax payers earning more than £42,385).
How you could invest up to a further £40,000
A £40,000 annual allowance usually applies to pension contributions each tax year. This includes personal contributions, employer contributions and benefits built up in a final salary scheme.
To simplify some complex rules, a new £40,000 allowance has effectively been introduced for contributions made from 9 July 2015 to 5 April 2016.
Contributions from 6 April 2015 to 8 July 2015 will reduce this new allowance, but only if they exceeded £40,000. If a pension input period was previously aligned to the tax year end this is the value of contributions made in that period. For other pensions, there may be a need to include contributions made in the previous tax year – the pension provider should be able to give guidance in this regard.
| Examples - how much can you contribute up to 5 April 2016 |
| | | |
| Contributions from 6 April 2015 to 8 July 2015 | | Allowance from 9 July 2015 to 5 April 2016 |
| £0 | | £40,000 |
| £15,000 | | £40,000 |
| £40,000 | | £40,000 |
| £60,000 | | £20,000 |
| £100,000* | | £0 |
| *Anything over £40,000 registered in this period uses up the new £40,000 allowance |
The ability to use unused carry forward allowance from three earlier periods remains unchanged. On this note, it is important to consider that contributions above £40,000 would only have been possible from 6 April 2015 to 8 July 2015, if there was unused annual allowance from an earlier period.
Recap - Budget confirms high earner pension tax relief cut
To recap and as previously advised, on 8 July 2015, the government announced that from 6 April 2016 onwards the annual allowance for tax relieved pension savings will be reduced for those with incomes of more than £150,000.
The annual allowance will be reduced by £1 for every £2 of income individuals have in excess of £150,000 with a maximum reduction of £30,000.
This would see those earning over £210,000 in a given tax year (6 April to the following 5 April) receiving an allowance of £10,000, with a sliding scale from £40,000 to £10,000 for those earning between £150,000 and £210,000. For those trading through a company, company profits are not relevant here, it is an individual’s income in that tax year that is key.
It also means that those with earnings in excess of £150,000 who were thinking of making a significant pension contribution should perhaps consider doing this in the 2015/16 tax year, as this will provide more flexibility and scope.
We are able to advise on the tax implications of making pension contributions. You should speak with your financial advisor in terms of investment advice and making pension contributions.