This might be the last year that you can make a significant pension contribution. You may be affected and you should seek our advice immediately.
There have been changes made to the amount of pension contributions that you can make in the future. So we thought it would be useful to outline the main changes and how we think they may affect you.
I’ve heard the amount I can contribute to a pension might change.
In the current tax year you can pay up to £40,000 into your pension, which is the Annual Allowance. This is the maximum you and your employer can contribute in a tax year and still receive tax relief.
Following the recent pension changes, and for this year only, you can ignore contributions made from 6th April 2015 to 8th July 2015. So, from 9th July 2015 until 5th April 2016 you can contribute £40,000 regardless. This may not make a huge difference, but it will allow some additional contributions to be made.
How much can I contribute next tax year?
Provided you earn under £150,000, you can still contribute up to £40,000 per tax year and get the tax relief at your highest rate.
What if I earn over £150,000?
The Budget included plans to limit how much high earners can pay into a pension without facing a tax charge. The change will apply to contributions from the 6th April 2016, with the annual allowance of £40,000 being tapered down to as little as £10,000.
The annual allowance will be reduced by £1 for every £2 earnt over the £150,000 threshold. This means that if you are earning over £210,000 in taxable income, the annual allowance will be reduced to £10,000. This will be the maximum you can pay and receive tax relief on.
Do employer contributions count?
Yes they do! The annual allowance is a combination of Employer and Personal contributions.
What if I earn over £150,000 per annum and my pension contributions are above the reduced annual allowance?
If you are affected by these changes, there are other tax efficient investments can you consider. Of course these are all dependant on your personal circumstances but to name a few:
- Use up your ISA allowance – currently £15,240 per person per annum, plus an allowance of £4,080 per annum for children.
- Venture Capital Trusts – any investment into a VCT would receive income tax relief at 30%. In addition all dividends are paid tax free and all gains are free of Capital Gains Tax. The maximum you can contribute is £200,000 per tax year and the investment must be held for a minimum of 5 years.
- Enterprise Investment Schemes – any investment into an EIS would receive income tax relief at 30%. Dividends are taxable however, all gains are free of Capital Gains Tax.
- Any loss within an EIS can be offset against gains elsewhere and previous CGT liabilities can be deferred by investing the gain into an EIS. The maximum you can contribute is £1,000,000 per tax year and the investment must be held for a minimum of 3 years.
If you would like any further on information on these, please do let me know.
You can still contribute more than the annual allowance and still receive tax relief via Carry Forward.
One aspect of pensions that was relatively unaffected was the use of ‘Carry Forward’. This allows you to look back 3 tax years and mop up any tax relief you haven’t used. You have to contribute the maximum in the current tax year first, and then look back to the earlier years. If you would like us to look at this for you, just let me know.
Does any of this affect the Lifetime Allowance?
Not directly. The Lifetime Allowance currently stands at £1.25 million and this will be reduced to £1 million from 6th April 2016. At the moment you can only protect the current allowance if your pension fund was valued at over £1.25 million on 5th April 2014. If you already have protection in place, nothing has changed and you are not affected.
Remember that if you have Protection, you are not able to continue contributing to a pension – you should also make sure that you opt out of any auto enrolment pension if applicable.
If you have any questions, please do not hesitate to contact us.
This factsheet is based on our understanding of the legislation as of 19th August and the Budget Statement released on the 8th July 2015.