Pension complication!
Post Author:
Angie Harvey
Date Posted:
November 8, 2018
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Cast your mind back to 6 April 2015 when the Government introduced a more flexible pension system. From that date, anyone over age 55 could make unlimited withdrawals from their Defined Contribution (“DC”) pension pot. Any withdrawals in excess of the 25% tax-free lump sum would be added to their income for the year and taxed accordingly.
The objective of this new pension regime was to encourage individuals to save for their retirement.
This all sounds wonderful, with tax relief at source for personal contributions and further tax relief for higher and additional rate taxpayers. Therefore, to dampen our enthusiasm the Government introduced further rules to restrict pension allowances for some taxpayers.
In our opinion calculating pension reliefs and allowances has never been more complicated. We have therefore produced a series of short blogs on some of the key issues currently being encountered by our clients. Our first blog considers the circumstances when the £40,000 annual allowance might be restricted.
Tapering of the annual allowance
It is probably fair to say that the Government don’t really want taxpayers to claim 45% tax relief on pension contributions (or 46% in Scotland). Their solution to this was to introduce the ‘tapered annual allowance’. In simple terms, an individual with taxable income over £150,000 will have their annual allowance (currently £40,000) for that tax year restricted. For every £2 of income they have over £150,000 their annual allowance is reduced by £1. The minimum annual allowance is £10,000 and applies to individuals with taxable income over £210,000.
So that means if you earn less than £150,000 you aren’t subject to this tapering…. right? Well, no not necessarily.
This is because there is another instance where taxpayers could see their annual allowance tapered. If someone has ‘threshold income’ of more than £110,000 then tapering might apply. Threshold income is broadly taxable income less any personal pension contributions paid. If threshold income is no more than £110,000 then the full annual allowance is available. If, however, threshold income is more than £110,000 the annual allowance will be restricted.
All hope is not lost quite yet though and in our next blog we will discuss how the carry-forward of unused allowances can sometimes be used to increase the level of contributions that can be paid.
Please also read our recent blogs
Pension Tax Charges and ‘Scheme Pays’
