Pension Contributions Get Complicated

Up until 6 April 2015, pension contribution limits, known as the annual allowance, were relatively simple.

In essence you could contribute up to £40,000 (gross) per annum either via an employer, individual or a combination of both. In addition, where you had unused annual allowance (AA) from the previous 3 tax years, you could carry forward the unused allowances to the current tax year.

Where it got slightly complicated, was determining the amount of contribution deemed payable in a tax year. Each pension scheme had a pension input period which usually lasted 12 months, but did not necessarily align with the tax year. It was possible to plan around pension input periods to use 2 annual allowances in one tax year.

With the introduction of the new ‘pension freedom’ and also the recent budget, we now have further changes. Changes relates to pension input periods In the budget, pension input periods (PIPs) are being simplified and from 6 April 2016 will be aligned with the tax year.

In order to align the PIP, transitional rules have been introduced and potentially certain clients will have the ability to contribute up to £80,000 (gross) into a pension in the current tax year. The PIP rules work as follows:

  • All open (pre-budget) PIPs will end on 8th July 2015 and count against the 2015/16 AA
  • All new (post budget) 2015/16 PIPS will run from 9 July 2015 to 5 April 2016
  • All PIPS will then be fixed and aligned with the tax years and cannot be amended in the future. How this affects the AA
  • Pre Budget IPPs and other 2015/16 PIPs that ended before 9 July 2015, will have an AA of £80,000
  • Post Budget PIPs will have any unused part of the pre- budget £80K AA, up to a maximum of £40K

In addition, there will still be the opportunity to pay more than the AA by making use of carry forward from earlier years. Annual Allowance Taper In the summer budget, additional complexity was proposed where someone earning over £150,000, will have their AA reduced by £1 for every £2 they are over the £150,000. The reduction is capped so someone earning £210,000 will have an AA of £10,000.

The complication is in the income calculation as it isn’t just earnings from employment or self –employment. It will be necessary to determine net income, which is total taxable income reduced by deductions listed in section 24 of the Income Tax Act 2007 (relief such as trading and share losses). It will then be necessary to add back in reliefs claimed under net pay arrangements, such as personal pension contributions as well as employer pension contributions. In addition anti avoidance legislation is being introduced to stop the manipulation of income to remain below the threshold such as salary sacrifice arrangements established post budget.

As the legislation needs to be passed in the Pensions Bill, we hope some of the complexity will be simplified. Money Purchase Annual Allowance Where an individual commences income payments under Flexible Access Drawdown (FAD), the Money Purchase Annual Allowance (MPAA) will be triggered and this means contributions that are made to a money purchase pension (such as Occupational Defined Contribution, IPPs or Personal Pensions) will have a new restricted annual allowance of £10,000 applied. It will still be possible to accrue benefits under a defined benefit pension and utilise the current unrestricted AA (less any money purchase contributions). As always, with the new and proposed changes to contribution limits, planning ahead is imperative to ensure you utilise the full allowances currently available.