60 MINS CPD COURSE THE TAX ASPECTS OF PENSION FUNDING

Transcription

1 60 MINS CPD COURSE THE TAX ASPECTS OF PENSION FUNDING

2 INTRODUCTION THE CURRENT EXEMPT-EXEMPT-TAXED PENSION SYSTEM INCENTIVISES PAYMENTS INTO REGISTERED PENSIONS BY PROVIDING AN UP-FRONT TAX EXEMPTION FOR THE MEMBER. THIS COURSE LOOKS AT THE OPERATION OF TAX RELIEF WITHIN DEFINED CONTRIBUTION SCHEMES AND THE LIMITS THAT CURRENTLY APPLY TO MEMBERS. LEARNING OBJECTIVES To understand: The operation of tax relief How the annual allowance restricts pension tax advantages The options for members who exceed the annual allowance 1

3 1. TAX RELIEF PAGE 3 HOW MUCH TAX RELIEF CAN BE RECEIVED? BASIC RATE RELIEF PAGE 4 HIGHER AND ADDITIONAL RATE RELIEF TAX RELIEF AGAINST DIVIDENDS PAGE 5 60% RELIEF PAGE 6 SALARY SACRIFICE 2. THE ANNUAL ALLOWANCE & CARRY FORWARD PAGE 8 WHAT IS THE CURRENT ANNUAL ALLOWANCE? PAGE 10 THE MONEY PURCHASE ANNUAL ALLOWANCE CONTRIBUTIONS THAT EXCEED THE MONEY PURCHASE ANNUAL ALLOWANCE PAGE 11 CARRY FORWARD THE TAPERED ANNUAL ALLOWANCE 3. EXCEEDING THE ANNUAL ALLOWANCE PAGE 14 ANSWERS TO SECTION QUESTIONS PAGE 16 2

4 1. TAX RELIEF HOW MUCH TAX RELIEF CAN BE RECEIVED? This depends on many factors, including: the client s earned income for the tax year, what type of scheme they are paying contributions to, their available annual allowance, the level of any employer contributions received, and the amount and type of other income received. The vast majority of pension scheme members are entitled to tax relief, but there are a number of situations where no tax relief is available: Those who are aged 75 or over are not entitled to tax relief on personal contributions. The legislation does allow them to make contributions without receiving tax relief, but many schemes cannot accept them for administrative reasons. Occupational schemes that operate on a net pay basis deduct personal contributions from salary before income tax is calculated. The amount of tax relief, therefore, is the income tax that would have been paid had that part of salary been subject to tax. If the salary would have fallen within the 11,500 income tax personal allowance, no income tax was due and therefore no tax relief is available on personal contributions. Members in this position should, provided they are not foregoing matching employer contributions, pay contributions to a scheme that operates on a relief at source basis such as a personal pension, which will entitle them to 20% tax relief. Contributions in excess of the annual allowance are subject to a tax charge that recovers the tax relief given on those contributions. There is no prohibition on exceeding the annual allowance, but the tax charge means that members should ultimately end up with no tax benefits on contributions above the allowance. Where tax relief is available it is usually given at the same rate the members pay on their income. We ll look at basic rate taxpayers first. BASIC RATE RELIEF 20% TAX RELIEF The majority of personal contributions attract basic rate tax relief. The member ultimately pays 80% of the total contribution. Gross personal contributions are allowed up to 100% of the member's relevant UK earnings (or up to 3,600 in a relief at source scheme). Earnings include salary, commission, bonuses, taxable benefits, trade earnings and other forms of income generated from employment or self-employment. Savings interest, dividends, pension income and other forms of investment income are not earnings. There are two main ways in which tax relief is granted: via net pay or relief at source : Relief at source is used mainly by personal pension schemes. Personal contributions are paid out of net income to which the provider adds basic rate relief, which means the member pays 80% of the total contribution and the provider adds 20% tax relief. This is then reclaimed by the provider from HMRC. Any tax relief at the higher or additional rates of income is claimed via self-assessment as explained further on. Net pay is more commonly used by occupational schemes. The full value of the contribution is deducted from salary before income tax, but not national insurance contributions (NICs), is deducted. Full income tax relief, therefore, at the member s highest marginal rate is available immediately. 3

5 HIGHER AND ADDITIONAL RATE RELIEF 40% TAX RELIEF 45% TAX RELIEF Higher and additional rate taxpayers benefit from 40% or 45% tax relief on their personal contributions provided that the contribution is no greater than the amount by which their income exceeds the relevant threshold. The mechanism differs depending on which tax relief mechanism the scheme uses. Under relief at source schemes, the basic rate relief is available in the usual way as described above. The additional 20% or 25% tax relief is claimed via selfassessment, which credits the excess relief directly to the taxpayer by reducing their overall income tax bill for the year. The mechanism that generates the additional tax relief is an extension to the basic rate / higher rate tax thresholds by the total value of tax-relievable personal contributions made in the tax year. This replaces an amount of income equal to the total value of contributions that was taxed at 40% or 45% but is now taxed at 20%. Full 40% or 45% tax relief is available immediately if the contribution is made to a net pay scheme: the full value of the contribution is deducted from earnings before income tax at 40% or 45% is applied. Tax relief at the higher and additional rates is limited to the amount of tax actually paid at those rates. A member earning 50,000, say, who pays 10,000 to a personal pension or occupational pension scheme only gets higher rate relief on 5,000 of the contributions because only 5,000 of income is subject to higher rate tax. The remaining 5,000 gets 20% tax relief. If the member is resident in Scotland, their higher rate threshold is lower in 2017/2018. The basic rate band is 2,000 less ( 31,500) than in the rest of the UK ( 33,500). The higher rate threshold, for those entitled to the full personal allowance is correspondingly lower: for Scottish residents it is 43,000 rather than 45,000 for the rest of the UK. This means that Scottish residents pay higher rate tax at lower levels of income and can, consequently, get slightly more tax relief at the higher rate than their UK counterparts. TAX RELIEF AGAINST DIVIDENDS Even though it is earned income that determines the amount of tax relievable personal contributions that can be paid, the tax reduction can apply to other types of income. Dividends for instance, sit on-top of most other types of income. As discussed previously, where a higher rate taxpayer makes a personal contribution to a relief at source scheme, it is the extension of the basic rate band that grants the additional 20% tax relief above the basic rate. A portion of income that would otherwise have been taxed at 40% is now taxed at 20%, granting the additional tax relief due to a higher rate taxpayer. If the income that sits within the extended part of the tax band is dividend income, the amount of additional tax relief can be as high as 25%: this is due to the difference between the dividend basic rate and dividend higher rate being 25% (32.5% - 7.5%), rather than 20%. 4

6 Example Salary: 35,000; dividends, 15,000. Gross contribution: 5,000 to a relief at source scheme. Before contribution After contribution Personal allowance ( 11,500 x 0%) 0 Personal allowance ( 11,500 x 0%) 0 Salary Salary Basic rate band ( 23,500 x 20%) 4,700 Basic rate band ( 23,500 x 20%) 4,700 Dividends Dividends Dividend allowance ( 5,000 x 0%) 0 Dividend allowance ( 5,000 x 0%) 0 Basic rate band ( 5,000 x 7.5%) 375 Basic rate band ( 10,000 x 7.5%) 750 Higher rate band ( 5,000 x 32.5%) 1,625 Total 6,700 Total 5,450 Total tax relief: 1,000 + ( 6,700-5,450) = 45% 5,000 20% tax relief 1,000 in this case is available when the contribution is paid to the pension provider. Higher rate relief is available via an adjustment to the client s tax bill. The effect of the client s income mix in this case means that 5,000 of dividends are now taxed at the basic rate of 7.5% rather than the higher rate of 32.5%, which generates 25% extra tax relief amounting to 45% in total. 60% RELIEF 60% TAX RELIEF Every 2 pound of excess income reduces the personal allowance by 1 until it is withdrawn completely. Income above 100,000 causes loss of the income tax personal allowance on a 2:1 basis. Every 2 pound of excess income reduces the personal allowance by 1 until it is withdrawn completely. Complete loss of the allowance is reached at twice the value of the personal allowance above 100,000: 123,000 in 2017/18, which is 100, x 11,500. The income that determines entitlement to the personal allowance is adjusted net income, which is taxable income less gift aid and personal contributions to relief at source pension schemes. This allows the personal allowance to be protected by making a personal contribution to a pension scheme or a charitable donation. 5

7 Example An individual earning 110,000 suffers a 5,000 reduction to their personal allowance, which becomes 6,500 in 2017/18 instead of the current 11,500. If they pay a 1,000 personal contribution to a pension, their income is deemed to be 109,000 instead of 110,000, so their personal allowance increases to 7,000. This means that in addition to benefitting from 40% relief on the contribution by virtue of being a higher rate taxpayer, 500 of income now escapes 40% tax. The additional 200 added to the 400 already received results in an effective rate of tax of 60%: ( ) / 1,000 = 60% SALARY SACRIFICE Salary sacrifice offers an alternative and usually more tax-efficient way of funding a pension. The salary used to fund personal contributions is given up in exchange for an employer contribution of equivalent value. Even though employer contributions are paid gross, they attract a similar level of tax relief to personal contributions by virtue of being a tax-free benefit for the employee; they also avoid NI deductions. It is this freedom from NICs that can make salary sacrifice so appealing. The resulting NIC savings can be used to increase the total contribution or the employee s take home pay. There are additional savings available to the employer, which they may decide to pass on in full or in part to their staff. Example Original salary: 40,000 Original gross contribution: 5,000 to a relief at source scheme. No employer NIC rebate. An 882 increase in the contribution to the pension can be achieved in this instance. Personal contribution Salary sacrifice Salary 40,000 Salary 34,118 Income tax / NICs 9,520 Income tax / NICs 7,638 Net contribution 4,000 Net contribution 0 Take home pay 26,480 Take home pay 26,480 Gross contribution: 5,000 Employer contribution: 5,882 Salary sacrifice has been used to enhance the pension contribution, whilst maintaining the same level of take home pay. The increase of 882 represents a significant enhancement to the original pension contribution: 882 = 17.6% 5,000 This increase is achieved without any corresponding reduction in tax elsewhere. 6

8 Section 1 Test your knowledge a) Can a member pay contributions into a pension scheme beyond age 75? b) How much a non-earner pay to their personal pension this tax year? c) A client has no earned income but receives 2,000 in dividends and 2,000 savings interest each tax year. How much can they pay to their personal pension this tax year? 7

9 2. THE ANNUAL ALLOWANCE & CARRY FORWARD THE ANNUAL ALLOWANCE IS SEPARATE FROM THE 100% OF EARNINGS LIMIT THAT APPLIES TO PERSONAL CONTRIBUTIONS. THE EARNINGS LIMIT CAPS THE AMOUNT OF TAX RELIEF AVAILABLE TO AN INDIVIDUAL ON THEIR PERSONAL CONTRIBUTIONS IN THE TAX YEAR. THE ANNUAL ALLOWANCE LIMITS CONTRIBUTIONS FROM ALL SOURCES AND RAISES A TAX CHARGE ON CONTRIBUTIONS THAT EXCEED IT. As referred to earlier, tax relief can be granted because a contribution is within 100% of earnings, but then withdrawn by a separate tax charge because the annual allowance is exceeded. This has the overall effect of limiting tax-efficient contributions to 40,000 each year or a lower amount if a restricted annual allowance, such as the tapered or money purchase annual allowance, applies to the member. WHAT IS THE CURRENT ANNUAL ALLOWANCE? 40, /18 ANNUAL ALLOWANCE The standard annual allowance for the current tax year (2017/2018) is 40,000. This limit applies to each individual in every tax year provided that neither of the restricted annual allowances applies. The current year s annual allowance can be increased under the carry forward rules. Carry forward The unused annual allowances of the three previous tax years can be carried forward and added to the current year s allowance. This process is now much simpler as pension input periods are aligned with the tax year, however misaligned periods of earlier tax years will continue to complicate carry forward calculations for the next couple of years. No application is required for carry forward; it is automatic. However, personal contributions must be noted on the main self-assessment form and any excess of pension input (money purchase contributions and defined benefit accrual) above the total annual allowance including carry forward must be declared on the supplementary self-assessment form. To be eligible for carry forward an individual must have been a member of a registered pension scheme in the tax year they wish to carry forward from. Most schemes qualify for this purpose: paid up personal pensions, scheme pensions paid to retired members of defined benefit schemes, former contracted out personal pensions. The key exception is an annuity, which is not a registered pension scheme. Once the current year s annual allowance has been used up any unused annual allowance from eligible tax years is carried forward to cover the excess. Earlier years are carried forward in priority to later years, with the exception of tax year 2015/

10 The transitional year: 2015/2016 The Summer Budget of 2015 announced changes to pension input periods and the annual allowance. These changes effectively ended the concept of pension input periods, which were an unnecessary complication in pension funding calculations. On 8th July 2015 all open pension input periods were closed automatically. A further pension input period covered the remainder of the tax year from 9th July 2015 to 5th April Pension input periods were fully aligned with the tax year thereafter. The first part of the tax year from 6th April 2015 to 8th July 2015 was termed the pre-alignment period ; the latter part, the post-alignment period. Accompanying this change was a temporary increase in the annual allowance to 80,000 but this only applied in the pre-alignment period. This ensured that no unfair tax charges arose against those who had already fully funded a pension input period that was originally scheduled to end in the following tax year. No annual allowance was available in the post-alignment period, but up to 40,000 could be carried forward from the pre-alignment period. Example Lily had a single pension plan with a pension input period that was due to end on 31st December The Summer Budget changes meant that this plan then had two pension input periods that ended in 2015/2016: The first ran from 1st January 2015 to 8th July 2015, The second ran from 9th July 2015 to 5th April She paid contributions of 63,000 to this plan from the period 1st January to 8th July 2015 (the pre-alignment period), and 9,000 was paid in the period from 9th July 2015 to 5th April 2016 (the post-alignment period). As Lily s total savings are less than 80,000 and her post budget savings are less than 40,000 she did not have an annual allowance excess in 2015/2016. Her pension input in other years is shown in the table below: Tax Year Annual Allowance Pension Input Amount Unused (excess) Carry Forward 1 Carry Forward / ,000 45,000 5,000 5,000 N/A 2014/ ,000 30,000 10,000 10,000 0 Pre-alignment 80,000 63,000 17, ,000 Post-alignment 0 9,000 N/A N/A N/A 2016/ ,000 55,000 ( 15,000) N/A 0 * The maximum carry forward from the pre-alignment year is the lower of the unused annual allowance and 40,000. This is further reduced by any contributions made in the post-alignment period. The 15,000 annual allowance excess in 2016/2017 used 5,000 carry forward from the 2013/2014 tax year and 10,000 from 2014/2015. The available carry forward to 2017/2018 can then be calculated: Nothing remains unused from 2014/2015 as the 30,000 contribution and the 10,000 carry forward to 2016/2017 used up the full 40,000 annual allowance of that year. The available carry forward from 2015/2016 is unused annual allowance of the pre-alignment period of 17,000 less the 9,000 that was carried forward to cover the post-alignment period contributions. This leaves 8,000 carry forward from 2015/ /2017 has been fully utilised already. In the carry forward calculation this is set to zero rather than a negative amount. This totals 8,000 carry forward, which can be added to the 40,000 annual allowance (or lower tapered amount if it applies) of 2017/

11 THE MONEY PURCHASE ANNUAL ALLOWANCE The money purchase annual allowance ( 4,000 from 6th April 2017) is a tax avoidance measure preventing not only recycling, but also pension scheme members from converting up to 40,000 of salary each tax year to an employer contribution and immediately withdrawing the full amount. 25% of the withdrawal would be free of income tax and all of it would be free of national insurance contributions, enabling tax to be avoided on a large chunk of salary. The receipt of any flexible income under the Freedom & Choice reforms triggers the money purchase annual allowance, which applies from the following day. Flexible income also includes a declaration for flexible drawdown, which was available before 6th April The triggers are: 4,000 MONEY PURCHASE ALLOWANCE Flexi-access drawdown income (not the tax-free cash) Uncrystallised funds pension lump sums Receipt of capped drawdown income in excess of the cap (after 5th April 2015) Annuities that can reduce in amount Stand-alone lump sums under primary protection Certain small scheme pensions Certain overseas payments Flexible drawdown set up before 6th April Once it has been triggered, the money purchase annual allowance applies to all of a member s money purchase contributions. It also applies indefinitely, not just for the remainder of the tax year. And that the trigger event can be on any day means that the tax year in which the trigger occurs is a special case: the year being split between the part during which the restriction did not apply and the rest of the year in which it does. Subsequent years are straightforward as the restriction covers the full tax year. Example Josephine takes advantage of the Freedom & Choice regime by converting her capped drawdown arrangement to flexi-access drawdown. She receives a drawdown payment on 1st October This triggers the money purchase annual allowance from 2nd October 2017 onwards. The tax year is split into two periods: 6th April 2017 to 1st October 2017: no MPAA 2nd October 2017 to 5th April 2018: MPAA applies This limits money purchase contributions to 4,000 during the latter period. In the earlier period and over the tax year as a whole, money purchase contributions and defined benefit accrual are subject to the standard annual allowance. From 6th April 2018 onwards the 4,000 MPAA applies to the whole tax year. CONTRIBUTIONS THAT EXCEED THE MONEY PURCHASE ANNUAL ALLOWANCE There is an annual allowance excess if the MPAA, the standard annual allowance or both are exceeded. The excess that the tax charge is based on will be the greater of: The excess over the MPAA plus the excess over the remainder of the annual allowance (the alternative annual allowance), The excess over the standard annual allowance. Carry forward can be added to the standard annual allowance and the alternative annual allowance, but not the MPAA. This ensures that any MPAA excess is not simply swept up into the remainder of the annual allowance. The alternative annual allowance is 36,000, which is the standard 40,000 allowance less the 4,000 MPAA. This covers defined benefit accrual and/or money purchase contributions paid before the trigger event in the relevant tax year. 10

12 Example Continuing with the example of Josephine, if she pays 10,000 to money purchase schemes after the trigger event and has annual accrual of 39,000 within her final salary scheme, her annual allowance excess for 2017/2018 will be the greater of: The MPAA excess plus the excess above the remaining allowance ( 10,000-4,000) = 6,000 ( 39,000-36,000*) = 3,000 6, ,000 = 9,000 The excess over the standard annual allowance 49,000-40,000* = 9,000 The annual allowance excess is, therefore, 9,000. *assumes no carry forward available If the MPAA is not exceeded, the annual allowance excess is just the excess of total contributions above the standard annual allowance including carry forward. CARRY FORWARD The MPAA cannot be enhanced by carry forward. The unused annual allowances of the three previous tax years can be added to the alternative annual allowance, which covers defined benefit accrual and money purchase contributions paid in the tax year before the trigger event. Example Returning to the example above, if Josephine has available carry forward of 5,000, her annual allowance excess will be the greater of: The MPAA excess plus the excess above the alternative annual allowance THE TAPERED ANNUAL ALLOWANCE Introduced on 6th April 2016, the tapered annual allowance is a restricted annual allowance that applies to those with high levels of income. Income above 150,000 results in the allowance being subject to a tapered reduction, the extent of which is determined by adjusted income a concept that is causing significant difficulties for advisers. The definition includes: taxable income as defined under the tax legislation; tax-relieved pension contributions to registered pension schemes, except those paid under relief at source; employer pension contributions; and other payments such as overseas payments. In addition, threshold income must be above 110,000 for the tapered annual allowance to apply. This is less important than the adjusted income test because, in the vast majority of cases, those with adjusted income above 150,000 will have threshold income in excess of 110,000. Nonetheless, a calculation of income against this definition should be carried out. The definition includes: taxable income adjusted for any post 8th July 2015 salary sacrifice; and a deduction for any personal contributions paid to pensions operating relief at source. The full, more detailed definitions can be found in HM Revenue & Customs Pension Tax Manual. If adjusted income and threshold income exceed 150,000 and 110,000, the annual allowance is reduced by 1 for every 2 of adjusted income above 150,000. The annual allowance cannot reduce below 10,000, which is reached at income levels of 210,000 or more. Carry forward from the previous three tax years can be added to the tapered annual allowance in the usual way (see previous example in this guide). The unused annual allowance of previous years will be based on the standard annual allowance of that year or the tapered annual allowance if it applied. This will only affect tax years from 2016/2017 onwards. The following example explains how the calculation of income might work. ( 10,000-4,000) = 6,000 ( 39,000 < 41,000) = nil 6,000 + nil = 6,000 The excess over the standard annual allowance 49,000-45,000 = 4,000 The annual allowance excess is, therefore, 6,

13 Example Jamie has high levels of income in 2017/2018. His salary is 180,000 before salary sacrifice. He was originally paying personal contributions of 7% to his employer s pension scheme, but in August 2015 decided to convert 5% of this to an employer contribution by entering into a salary sacrifice agreement. The employer s additional ongoing contribution is 10%. His share portfolio paid out dividends of 10,000 in the tax year. Calculate adjusted income: Taxable income: 171,000 salary - 3,600 net pay + 10,000 dividends 177,400 Plus net pay contributions: 3,600 ( 180,000 x 2%) 3,600 Plus employer contributions: 27,000 ( 180,000 x 15%) 27,000 Total 208,000 Calculate threshold income: Taxable income: 171,000 salary - 3,600 net pay + 10,000 dividends 177,400 Plus employer contributions paid via new salary sacrifice: 9,000 9,000 Total 186,400 Because adjusted income and threshold income are above their respective trigger levels, the tapered annual allowance will apply. Calculate the tapered annual allowance: Adjusted income excess: 208, ,000 58,000 Annual allowance reduction: 58,000 / 2 29,000 Tapered annual allowance 11,000 Jamie s annual allowance for 2017/2018 will be 11,000. This amount can be increased by any available carry forward from the three previous tax years. 12

14 Section 2 Test your knowledge a) My client wants to use carry forward. What does he need to tell HMRC? b) How does carry forward reduce the annual allowance charge? c) What pension input periods are permitted from 6th April 2016 onwards? d) Can carry forward from earlier years be added to the tapered annual allowance? e) What is the MPAA and what level is it set at? 13

15 3. EXCEEDING THE ANNUAL ALLOWANCE Total money purchase contributions and defined benefits accrued in the tax year above the annual allowance and carry forward give rise to an income tax charge. The excess amount is added to the member s other taxable income and taxed at their marginal rate. For example, if the annual allowance excess is 10,000 and 5,000 falls in the basic rate band and 5,000 falls within the higher rate band, the tax liability will be 3,000, which is 20% x 5, % x 5,000. The excess must be declared on the supplementary self-assessment form. The tax charge will be added to the liability for the year, with payment due by 31st January after the end of the tax year. Tax relief must still be claimed on personal contributions. In some cases, the tax charge can be deducted from pension scheme benefits using the scheme pays option. Schemes are obliged to offer scheme pays where the annual allowance charge for the year is greater than 2,000 and the pension input amount to the scheme in the year exceeded the standard 40,000 annual allowance. The member must notify the scheme that they wish to use scheme pays by 31st July of the year following the year in which the tax year ended: e.g. 31st July 2018 for an annual allowance excess that arose in the 2016/2017 tax year. The member must still notify HM Revenue & Customs of the annual allowance excess using self-assessment. An annual allowance excess, once calculated, is taxed in the same way whether it relates to the MPAA, the tapered annual allowance or the standard annual allowance. However, as schemes only have to offer scheme pays where pension input exceeds 40,000, many of those affected by a restricted annual allowance such as the tapered annual allowance or the MPAA will not have recourse to the scheme pays option. In which case, the tax charge must be settled directly with HM Revenue & Customs via self-assessment. 14

16 Section 3 Test your knowledge a) My client will exceed the annual allowance. What happens to the excess contributions? b) Can scheme pays be used where the tapered annual allowance is exceeded? 15

17 ANSWERS TO SECTION QUESTIONS 1a) These are permitted under the legislation; however tax relief will not be available. In practice this means many providers will not accept them. 1b) 3,600. 1c) 3,600. 2a) It is not necessary to use a special form or tell HMRC in advance if you want to use carry forward. If contributions fall within the annual allowance plus carry forward allowances, it won t be necessary to report anything via a self-assessment tax return either. 2b) Provided that the individual was a member of a registered pension scheme in each tax year that they want to carry forward from, they can add the unused annual allowances of each of the previous three years to the current year s annual allowance. The current year s allowance will be utilised first, followed by the allowance of the earliest available year, then the next earliest year and so on. No application is required for carry forward it applies automatically. An annual allowance excess, and thus a charge, only occurs if the annual allowance plus carry forward is exceeded. 2c) From April 2016 onwards, pension input periods are aligned with the tax year and cannot be changed. Prior to this the position was more complicated, which still matters where carry forward is being used. 2015/2016 was a transitional year: following the announcement in the 2015 Summer Budget, any open pension input period was automatically closed on 8th July 2015; a new pension input period then covered the rest of the tax year from 9th July 2015 to 5th April Prior to this, pension input periods could have started and ended on any day during the tax year. 2d) Yes, carry forward can be added to the tapered annual allowance. The carry forward amounts for tax years prior to 2016/2017 will be based on the full allowance of 40,000. Carry forward from tax years 2016/2017 onwards to later years will be based on the tapered annual allowance for that year, if it applied. 2e) It is a reduced annual allowance that restricts the amount of tax-efficient pension contributions that can be made by those who have accessed their pension flexibly. From 6th April 2017, the MPAA is 4,000. It applies from the start of the 2016/2017 tax year despite the previous uncertainty over its implementation caused by the snap general election. 3a) Where total pension contributions and/or accrual exceeds the annual allowance (including carry forward) for a tax year, the excess will be added to the client s other income and taxed at their marginal rate of income tax. There is no facility to the return the excess contributions to the client. Any contributions, however, that were genuinely made in error may be refunded following the guidelines for that particular scheme. 3b) Not necessarily. HMRC practice is that the provider is only obliged to offer Scheme Pays where the total charge is at least 2,000 and the member has paid at least 40,000 to the scheme in respect of the relevant tax year. As the tapered annual allowance can give rise to a tax charge where contributions of much less than 40,000 were paid scheme pays will not always be an option. 16

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20 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /17