Pulling pension input periods into line28 September 2015 Back to results
The Summer Budget on 8 July 2015 announced the Government’s intention to align all PIPs with tax years from 6 April 2016 onwards and brought some immediate changes in the 2015/16 tax year. A full summary of the proposed changes can be found here https://www.aegon.co.uk/news/news-articles/pip-pip-hooray.html
As with most changes in pension legislation there are potential winners and losers. Sadly, it will no longer be possible for members of defined contribution schemes to vary a PIP end date in order to pay contributions over the annual allowance in a tax year and avoid an annual allowance charge. The good news is that carry forward will continue to be available and so any unused allowance from the previous three years can still be brought forward to the current year. Also, moving to a tax year basis from 6 April 2016 will be easier for most people to understand and therefore should be welcomed.
For the 2015/16 tax year there is some complexity with the tax year being split into pre-alignment and post-alignment periods (commonly referred to as ‘mini tax years’) for annual allowance purposes. To recap:
- ‘mini tax year 1’ covering total contributions paid (or benefits built up) in pension input periods ending in the period 6 April 2015 to 8 July 2015 subject to a transitional annual allowance of £80,000 (plus any unused allowance carried forward from 2012/13, 2013/14 and 2014/15), and
- ‘mini tax year 2’ covering total contributions paid (or benefits built up) in the period 9 July 2015 to 5 April 2016 subject to a transitional annual allowance of £Nil but with the ability to carry forward any remaining allowance from mini tax year 1 up to a maximum of £40,000 (plus any unused allowance carried forward from 2012/13, 2013/14 and 2014/15 that’s not already been used in mini tax year 1).
Despite this complexity, the transitional rules present a number of additional funding opportunities where contributions have already been paid by and on behalf of members in pension input periods ending in the period 6 April to 8 July 2015.
Let’s look at an example. Brian is a member of a SIPP and his PIP runs from 6 April to 5 April in each year. For 2015/16 he intended to pay £40,000 by way of regular monthly contributions of £3,333.33 and he had an unused allowance of £46,000 available to carry forward from the previous three years. In the period between 6 April 2015 and 8 July 2015, he paid three monthly contributions (c.£10,000) and also made a one-off payment of £46,000. Brian was under the impression that the combination of his one-off payment and his regular monthly contributions over the PIP would maximise all of his available allowances for 2015/16.
Even though his PIP already ran in line with tax years, it will have closed on 8 July and restarted again on 9 July running through to 5 April 2016. The £56,000 total contributions he paid in the period 6 April to 8 July 2015 will simply be absorbed by the £80,000 annual allowance for mini tax year 1. As a result, £24,000 can then be carried forward to mini tax year 2, and his unused allowance of £46,000 from the previous three years will also be available to be carried forward to mini tax year 2. Brian now has scope to pay an additional £70,000 in the remainder of 2015/16 rather than the £30,000 he intended with his regular monthly contributions. (His total personal contributions for 2015/16 will only be fully tax relievable if he has sufficient qualifying earnings in the tax year.)
This is only one example of the many advice opportunities that now exist as a result of the PIP changes and transitional rules. Clients looking for additional funding opportunities in 2015/16 may include anyone who is likely to be affected by the tapering annual allowance provisions being introduced from 6 April 2016, anyone who has already made a large contribution early in 2015/16, anyone who has already completed a carry-forward exercise early in 2015/16, and anyone thinking about applying for one or more of the lifetime allowance protections being introduced as a result of the reduction to £1m from 6 April 2016. With the future of pension tax relief currently under review by Government all opportunities to maximise pension contributions now may be worth exploring sooner rather than later.
This article is based on our current understanding of the information contained in the Finance Bill 2015-16 and in HM Revenue & Custom’s (HMRC) technical note(Opens new window) dated 8 July 2015. The final position will be set out in a Finance Act, which is not yet available.