TECHTALK. If your client can only make personal contributions, they will be limited by the higher of their relevant UK earnings or 3,600.

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1 TECHTALK This article originally appeared in JAN 18 edition of techtalk. Please visit for the latest issue. REACH YOUR LIMIT: TAX YEAR END PENSION PLANNING Your employed clients can maximise their pension funding before the tax year ends. We explain the details here. THOMAS COUGHLAN Tom has spent over 15 years in technical roles. He has wide experience including the provision of technical support to financial advisers covering life, pensions and investment compliance. He currently specialises in pension planning. We provide everything you need to know to help your employee clients maximise their pension funding in a single article. As the end of the tax year comes into sight, clients who can afford further contributions should consider making a single contribution, or a series of regular contributions, to their pension plan to get the maximum benefit out of the current pension tax system. A number of recent changes and additional restrictions have made this more complicated so to help you we have summarised the factors you ll need to consider. RELEVANT UK EARNINGS If your client can only make personal contributions, they will be limited by the higher of their relevant UK earnings or 3,600. This is the maximum tax-relieved personal contribution allowed in a tax year. For administrative reasons, most pension providers only accept personal contributions paid net of tax relief. The effect of this is to prohibit contributions that are not eligible for tax relief, such as those in excess of earnings (or 3,600 if higher for personal pensions) or those paid by the over 75s who are not entitled to tax relief. If your client can only make personal contributions, they will be limited by the higher of their relevant UK earnings or 3,600.

2 The earnings limit is separate from the annual allowance, which means personal contributions in excess of 40,000 can be made in a tax year and receive tax relief. However, if the annual allowance including carry forward is exceeded, a separate annual allowance tax charge operates to reclaim some of the tax relief which was given initially. A, B & C earn the amounts detailed in the table below. They are contributing to a personal pension that can only accept contributions that receive tax relief. They have not paid or benefitted from any contributions or accrued final salary benefits in the current tax year. The maximum amount they can pay before the end of tax year is: Relevant UK earnings Maximum contribution A 1,600 3,600 B 16,000 16,000 C 160, ,000 Clients A and B are well within their annual allowance, assuming neither of the restricted annual allowances apply. C, however, will exceed their annual allowance (unless full carry forward is available) and so will suffer an annual allowance tax charge. This has the effect of recovering the excess tax relief. THE ANNUAL ALLOWANCE AND CARRY FORWARD The earnings limit only applies to personal contributions, but the annual allowance limits the total of all contributions personal, employer and third party as well as benefits built up within defined benefit schemes. Since pension input periods (PIPs) were aligned with the tax year from 6th April 2016, only contributions actually paid within the tax year and benefits built up over that period are aggregated together and tested against the annual allowance. This is a much simplified process, however PIPs still need to be understood if carry forward from 2015/16 and/or 2014/15 is being used. As a reminder, carry forward allows the unused annual allowances of the three previous years to be swept up and added to this year s annual allowance. Your client must have been a member of a registered pension scheme in the tax year they wish to carry forward from. The current year is used first, then the earliest of the three previous years, then the subsequent year and then the most recent year. There is often confusion about what carry forward relates to, but the rules are straightforward: it is only the unused annual allowance from each eligible year that can be brought forward. Earnings from previous years cannot be carried forward; nor can the 3,600 de minimis limit. A consequence of this is that relevant UK earnings must be at least as high as the personal contributions the client wishes to make to utilise carry forward. For example, a client who wishes to make a 160,000 personal contribution (the maximum contribution within the annual allowance plus carry forward), must have relevant UK earnings of at least 160,000. Their earnings in previous years are not relevant. END OF TAX YEAR TIPS Clients can pay up to 100% of their relevant UK earnings into a pension, however this should not be done without also considering the impact of the annual allowance. Carry forward allows the unused annual allowances of the three previous years to be swept up and added to this year s annual allowance. Clients should make contributions that benefit from the top rates of tax: 40% and 45% for higher and additional rate taxpayers, and 60% for those with income between 100,000 and 123,000.

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4 WHAT ABOUT PENSION INPUT PERIODS? When using carry forward, you will have to determine how much annual allowance remained unused in each of the previous three tax years. 2014/15 and 2015/16 are more complicated than 2016/17 because the PIPs were not necessarily aligned with the tax year. PIPs were the period of time over which pension input was measured for testing against the annual allowance. The tax year the end date of the PIP fell into determined which year s annual allowance the pension input was set against. For instance, if the end date of the PIP was 31st December 2014 all pension inputs for that period (which most likely ran from 1st January 2014 to 31st December 2014) were set against the 2014/15 annual allowance. In 2014/15, therefore, for each scheme your client is/was a member of you must determine which PIPs ended between 6th April 2014 and 5th April All contributions paid and benefits accrued during these periods are totalled and deducted from the standard 40,000 annual allowance that applied in that year. 2014/15: 40,000 less total pension input during PIPs that ended between 6th April 2014 to 5th April /16 pre-alignment period: 80,000 (but carry forward capped at 40,000) less total pension input during PIPs that ended between 6th April 2015 and 8th July The PIP for the post-alignment period was a fixed period from 9th July 2015 to 5th April All contributions paid and benefits accrued during this period were set against the remainder of the annual allowance from the pre-alignment period, which was capped at a maximum of 40, /16 post-alignment period: Maximum 40,000 of the unused 80,000 annual allowance from the pre-alignment period less total pension input from 9th July 2015 to 5th April For 2016/17, thankfully, the calculation is straightforward: reduce the standard 40,000 annual allowance (or tapered annual allowance) by the pension input amount, which is the total of all contributions paid and benefits accrued from 6th April 2016 to 5th April /16 was the tax year in which the changes to PIPs were announced, and predictably it is the most complex. On the day of the Summer Budget th July all open PIPs were automatically closed. A further PIP covered the remainder of the tax year from 9th July 2015 to 5th April PIPs 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. The annual allowance in the pre-alignment period was 80,000; there was no annual allowance in the post-alignment period, but a maximum of 40,000 of the unused annual allowance of the pre-alignment period could be used in the post-alignment period. This was in preference to carry forward from earlier years. The PIPs that ended between 6th April 2015 and 8th July 2015 were tested against the 80,000 annual allowance of the pre-alignment period, and there could have been more than one for each scheme. Again, all contributions paid and benefits accrued during PIPs that ended between these dates are set against the annual allowance that applied in that period. 2016/17: 40,000 or the tapered annual allowance less total pension input between 6th April 2016 to 5th April Once you have worked out the available annual allowance in the current tax year and each of the previous three tax years, the maximum contribution without incurring a tax charge can be worked out: 1) 2017/18; the current year s unused annual allowance, plus 2) 2014/15: the unused annual allowance of the earliest year, plus 3) 2015/16: the unused annual allowance of the pre-alignment tax year, capped at 40,000, less the pension input amount in the post-alignment period, plus 4) 2016/17: the unused annual allowance of the previous year. Total

5 To calculate the tapered annual allowance for your client, use the Tapered Annual Allowance Calculator on the Scottish Widows Adviser Extranet. WHAT ABOUT THE ANNUAL ALLOWANCE TAX CHARGE? If the total pension input in a given tax year exceeds the annual allowance plus carry forward, the excess is added to the member s income and taxed according to the tax band that it falls in. E.g. if an additional rate taxpayer has total pension input of 130,000 and an available annual allowance plus carry forward of 120,000, they will be subject to a 4,500 tax charge - which is 45% against the 10,000 excess pension input. WHAT IF THE ANNUAL ALLOWANCE IS RESTRICTED? If the tapered annual allowance applies in either 2016/17 or 2017/18, the process followed above applies in the same way, but with the reduced allowance substituted for the standard 40,000 allowance. To calculate the tapered annual allowance for your client, use the Tapered Annual Allowance Calculator on the Scottish Widows Adviser Extranet. If the money purchase annual allowance applies, contributions to defined contribution schemes are restricted to 4,000 in the tax year without carry forward. It is triggered by flexible access to pensions after 5th April Defined benefit accrual can continue and will be tested against the remainder (36,000) of the standard annual allowance with carry forward available. END OF TAX YEAR TIPS Carry forward relates to the unused annual allowances of the three previous tax years. Unused earnings or the 3,600 de minimis limit cannot be carried forward. The use of personal contributions to utilise carry forward requires sufficient relevant earnings in the current tax year. E.g. a 160,000 gross personal contribution utilising full carry forward would require relevant UK earnings of 160,000. The tapered annual allowance and the money purchase annual allowance are covered in more detail in Bernadette s article, also in this edition. Note: Scottish resident taxpayers will have their own income tax rates and bands from 2018/2019 which may affect the tax outcomes in our examples.

6 IN 2017/2018 GRAEME EARNED FROM 31st DECEMBER 2010 TO 31st DECEMBER 2016 HIS PREVIOUS CONTRIBUTIONS PER MONTH WERE CARRY FORWARD TOTAL 65,000 3,000 70, /15 total contribution 36,000 Monthly contributions of 3,000 per month were paid during the PIP that ran from 1st January 2014 to 31st December /16 Total pension input 18,000 Pre-alignment period monthly contributions of 3,000 per month were paid during the PIP that ran from 1st January 2015 to 8th July /16 Total pension input 27,000 Post-alignment period monthly contributions of 3,000 per month were paid during the PIP that ran from 9th July 2015 to 5th April /17 Total pension input 27,000 Monthly contributions of 3,000 per month were paid during the PIP that ran from 6th April 2016 to 5th April EXAMPLE Graeme earns 65,000 in 2017/2018 and has not made any contributions in the current tax year. His previous contributions were 3,000 per month running from 31st December 2010 to 31st December His adviser has recommended that he pay the maximum contribution he can to his personal pension before 6th April His unused annual allowances from 2014/15 onwards are as follows: 2014/15 monthly contributions of 3,000 per month were paid during the PIP that ran from 1st January 2014 to 31st December Total contribution = 36, /16 pre-alignment period monthly contributions of 3,000 per month were paid during the PIP that ran from 1st January 2015 to 8th July Total pension input = 18, /16 post-alignment period monthly contributions of 3,000 per month were paid during the PIP that ran from 9th July 2015 to 5th April Total pension input = 27, /17 monthly contributions of 3,000 per month were paid during the PIP that ran from 6th April 2016 to 5th April Total pension input = 27,000 Carry forward calculation: 2017/18: 40, , /15: 40,000-36,000 4,000 Pre-alignment: 40,000-27,000 13,000* 2016/17: 40,000-27,000 13,000 Total 70,000 *carry forward was from the pre-alignment period but reduced by the post-alignment contributions. The total annual allowance plus carry forward is more than Graeme s relevant UK earnings, so he will only be able to pay 65,000 in personal contributions. He must be able to benefit from an employer contribution of 5,000 to be able to maximise his carried forward allowance. Tax-relieved third party contributions are not an option once his relevant UK earnings have been exhausted. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. 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