Aligning pension input periods and the tapered annual allowance

Transcription

1 ADVISER FACTSHEET Tech Talk August 2015 Aligning pension input periods and the tapered annual allowance Pension input periods are an important part of the annual allowance. Changes to the annual allowance were announced in the recent Budget, in particular the tapering of the annual allowance from 6 April 2016 for individuals with high incomes. In advance of this, transitional rules are being introduced to align pension input periods with the tax year from 6 April 2016 and to protect individuals from an annual allowance charge on pre 9 July 2015 pension savings. In addition to giving a brief overview of the transitional rules, this Tech Talk outlines how the tapering of the annual allowance will work from 6 April What follows is based on published draft guidance and therefore may be subject to change. Contents For professional advisers only Pension input periods from 6 April 2016 Transitional PIP rules for 2015/16 Annual allowance 2015/16 Money purchase annual allowance 2015/16 Calculating pension input amounts for 2015/16 Carry forward of unused annual allowance The tapered annual allowance Interaction between the MPAA and the tapered annual allowance Comment

2 Pension input periods from 6 April 2016 For the 2016/17 tax year, all existing arrangements will have a 12 month pension input period (PIP) aligned to the tax year. All subsequent PIPs will be aligned with the tax year. Varying a PIP will no longer be possible. Transitional PIP rules for 2015/16 All PIPs open on 8 July 2015 end on that date, with the next PIP running from 9 July 2015 to 5 April The 2015/16 tax year is split into two for the purpose of the annual allowance. The period from 6 April 2015 up to and including 8 July 2015 is referred to as the pre-alignment tax year and the period from 9 July 2015 up to and including 5 April 2016 is referred to as the post-alignment tax year. What this means is that under an existing arrangement, an individual will have either two or three PIPs ending in the 2015/16 tax year. EXAMPLE 1 PIP running from 1 September to 31 August from 1 September 2014 the PIPs run as follows: 1 September 2014 to 8 July July 2015 to 5 April April 2016 to 5 April 2017 (2016/17 tax year) In this scenario two PIPs end in the 2015/16 tax year. PIP running from 1 June to 31 May from 1 June 2014 the PIPs run as follows: 1 June 2014 to 31 May June 2015 to 8 July July 2015 to 5 April April 2016 to 5 April 2017 (2016/17 tax year) In this scenario three PIPs end in the 2015/16 tax year. Note that the PIP that started on 1 June 2015, which was due to end in the 2016/17 tax year, ends in the 2015/16 tax year as a result of the changes. Annual allowance 2015/16 The annual allowance for the pre-alignment tax year is 80,000 and for the post-alignment tax year it is nil. Any unused annual allowance from the pre-alignment tax year is carried forward to the post-alignment tax year subject to a maximum of 40,000. Unused annual allowance from the three tax years prior to 2015/16 can still be taken into consideration. However, any unused annual allowance from these years is used to offset any excess i.e. pension input amount greater than 80,000 in the pre-alignment tax year first with any remainder being available for the post-alignment tax year. This is illustrated in the following examples. 2

3 EXAMPLE 2 Julie has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling 50,000. Her pension input amount in respect of the pre-alignment tax year is 30,000. For Julie to avoid an annual allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for the post-alignment tax year? The answer is 90,000. This is broken down as follows: Unused annual allowance from the pre-alignment tax year is 50,000 ( 80,000-30,000), meaning that Julie is able to carry forward the maximum of 40,000 to the post-alignment tax year. None of the unused annual allowance from the three tax years immediately prior to 2015/16 has been used in the pre-alignment tax year, meaning that an additional 50,000 is available for the post-alignment tax year, giving a total of 90,000 ( 40, ,000). EXAMPLE 3 Pedro has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling 50,000. His pension input amount in respect of the pre-alignment tax year is 70,000. For Pedro to avoid an annual allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for the post-alignment tax year? The answer is 60,000. This is broken down as follows: Unused annual allowance from the pre-alignment tax year is 10,000 ( 80,000-70,000), meaning that Pedro is able to carry forward 10,000 to the post-alignment tax year. None of the unused annual allowance from the three tax years immediately prior to 2015/16 has been used in the pre-alignment tax year, meaning that an additional 50,000 is available for the post-alignment tax year, giving a total of 60,000 ( 10, ,000). EXAMPLE 4 Tracyann has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling 50,000. Her pension input amount in respect of the pre-alignment tax year is 90,000. For Tracyann to avoid an annual allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for the post-alignment tax year? The answer is 40,000. This is broken down as follows: Unused annual allowance from the pre-alignment tax year is nil, as the pension input amount exceeded 80,000. Also, 10,000 of the unused annual allowance from the three tax years immediately prior to 2015/16 has been used in the pre-alignment tax year, meaning that 40,000 remains and is available for the post-alignment tax year giving a total of 40,000 ( ,000). 3

4 For the individuals in Examples 2 to 4, pension input amounts generated in the 2016/17 tax year will be tested against their annual allowance for that year. Carry forward of unused annual allowance will still be an option beyond 5 April 2016 (see below). Note that for other money purchase arrangements the total pension input amount for the prealignment tax year is the sum of the pension input amounts for all PIPs ending in the pre-alignment tax year. Looking again at Example 1 above: In the first scenario the pension input amount from the PIP 1 September 2014 to 8 July 2015 In the second scenario the sum of the pension input amounts from the PIPs 1 June 2014 to 31 May 2015 and 1 June 2015 to 8 July 2015 The pension input amount for the post alignment tax year is measured over the period 9 July 2015 to 5 April For defined benefit and cash balance arrangements a different approach is used (see below). Money purchase annual allowance 2015/16 Under existing legislation, where the money purchase annual allowance (MPAA), currently 10,000, applies and is exceeded, the alternative annual allowance needs to be considered. Pension input amounts from defined benefit arrangements and any pension input amounts from money purchase arrangements not tested against the MPAA are taken into account when testing against the alternative annual allowance, currently 30,000. Unused annual allowance from the three previous tax years can be used to increase the alternative annual allowance. If the MPAA has been triggered in the prealignment tax year, the MPAA for pre-alignment tax year is 20,000 and the alternative annual allowance for this period is 60,000. The MPAA for the post-alignment tax year is nil. However, any unused MPAA from the pre-alignment tax year, subject to a maximum of 10,000, is carried forward to the post-alignment tax year. The alternative annual allowance for the post-alignment tax year is also nil, but again any unused annual allowance from the pre-alignment tax year and any unused annual allowance from the three tax years immediately prior to 2015/16 can be carried forward. Where the money purchase pension input amount tested against the MPAA in the pre-alignment tax year did not exceed 10,000, then up to 40,000 can be carried forward from the pre-alignment tax year. Alternatively, if the money purchase pension input amount tested against the MPAA in the pre-alignment tax year did exceed 10,000, then the maximum that can be carried forward from the pre-alignment tax year is limited to 30,000. Where the MPAA is triggered in the post alignment tax year, the MPAA is 10,000 for the post alignment tax year and the alternative annual allowance will be up to 30,000. Further consideration of the impact of the alignment of pension input periods on the MPAA in the 2015/16 tax year, including examples, will be undertaken in a separate Tech Talk. 4

5 Calculating pension input amounts for 2015/16 For other money purchase arrangements, the calculation of pension input amounts for all PIPs ending in the 2015/16 tax year is done in exactly the same way as per current legislation, but taking account of the PIP changes. For defined benefit and cash balance arrangements, the calculation of the pension input amounts for the pre and post alignment tax years follows special rules and will be covered in a separate Tech Talk. Carry forward of unused annual allowance As illustrated in Example 4 above, any unused annual allowance being carried forward to 2015/16 from the three tax years immediately prior to it is applied to the pre-alignment tax year first with any remainder being available for the post-alignment tax year. When dealing with carry forward to the post-alignment tax year, it is the unused annual allowance from the pre-alignment tax year (if any) that is used first before any remaining unused annual allowance from the three tax years immediately prior to 2015/16. Carrying forward unused annual allowance to the three tax years after 2015/16 works in the normal way. However, the way unused annual allowance for the 2015/16 tax year is calculated is affected by the changes. It will never be more than 40,000. The exact amount available will be the amount available for carry forward from the pre-alignment tax year to the post-alignment tax year less the amount of the pension input amount for the post-alignment tax year. EXAMPLE 5 Matt s pension input amount for the pre-alignment tax year is 50,000. Therefore, the amount of unused annual allowance available for carry forward to the post-alignment tax year is 30,000 ( 80,000-50,000). If Matt s pension input amount for the post-alignment tax year is 20,000, this would mean that 10,000 of unused annual allowance would be available in respect of 2015/16 for carry forward to future tax years. 5

6 The tapered annual allowance From 6 April 2016, individuals with adjusted income in excess of 150,000 in a tax year will have their annual allowance in that tax year reduced. For every 2 of income they have over 150,000, their annual allowance is reduced by 1. The maximum reduction to the annual allowance will be 30,000, so that individuals with adjusted income of or above 210,000 will have an annual allowance of 10,000. Where an individual has threshold income of 110,000 or less, the tapering of the annual allowance will not apply regardless of the level of their adjusted income. The income definitions are as follows: Adjusted income the individual s net income for the tax year as calculated under steps 1 and 2 of section 23 of the Income Tax Act 2007, plus the amount of any relief under section 193(4) of Finance Act 2004 (a claim for excess relief under net pay) and section 194(1) of Finance Act 2004 (relief on making a claim) deducted at step 2, plus the amount of any pension contributions made from any employment income of the individual for the tax year under net pay, under section 193(2) of Finance Act 2004, (to ensure fairness between those who have contributions deducted via net pay and those through relief at source), plus the value of any employer contributions for the tax year, but less the amount of any lump sum death benefits that accrue to the individual in the tax year mentioned in section 636A(4ZA) The value of employer contributions in respect of an arrangement for a tax year will be the pension input amount for the arrangement for the tax year less the total of any contributions made by or on behalf of the individual. Threshold income the individual s net income for the tax year as calculated under steps 1 and 2 of section 23 of the Income Tax Act 2007, less the gross amount of any pension contributions made through relief at source, less the amount of any lump sum death benefits accruing to the individual in the tax year mentioned in section 636A(4ZA), plus the amount of any employment income given up for pension provision as a result of any salary sacrifice made on or after 9 July 2015 The carry forward of unused annual allowance from the three previous tax years will still be available. However, where in a tax year the tapered annual allowance applies, the amount available for carry forward to future tax years will be the balance of the tapered amount. where non domiciled individuals make contributions to overseas pension schemes, any relief claimed under Chapter 2 of Part 5 of the Income Tax (Earnings and Pensions) Act 2003 for the tax year, plus 6

7 EXAMPLE 6 Natalie s adjusted income for the 2016/17 tax year is 180,000 and her threshold income exceeds 110,000. Therefore, she is subject to a reduced annual allowance in that year of 25,000. Her total pension input amount for the tax year is 20,000, meaning that she has 5,000 of unused annual allowance from the 2016/17 tax year available for carry forward to future tax years. Interaction between the MPAA and the tapered annual allowance Where an individual in a tax year is subject to the taper and the MPAA, the MPAA rules apply, but with references to the annual allowance replaced with the tapered annual allowance. What this means is that in a tax year where the MPAA applies and if the MPAA is not exceeded, then the annual allowance test for the tax year is carried out in the normal way using the tapered annual allowance rather than the annual allowance. However, if the MPAA is exceeded in a tax year in which it applies, then the taper is applied to the alternative annual allowance (currently 30,000). Therefore, for such individuals with adjusted incomes of 210,000 or more, they will have an alternative annual allowance of nil although any available carry forward from the three previous tax years can be added to this. Defined benefit pension input amounts, and any money purchase pension input amounts not tested against the MPAA in the tax year, are tested against the alternative annual allowance. More on this, including examples, will follow in a future Tech Talk. 7

8 Comment Beyond April 2016 the alignment of the pension input period with the tax year does remove an element of complexity in pension tax legislation, which is welcome, although this is offset somewhat by the loss of the ability to manipulate pension input periods in order to maximise pension funding in a tax year. When the MPAA is factored in, the complexity involved increases considerably and for this reason, a separate bulletin will deal with the issues specific to the MPAA. The calculation of pension input amounts for defined benefit and cash balance arrangements will also be covered in a separate bulletin. In addition, the alignment will give some individuals greater scope to make more tax efficient pension savings in the 2015/16 tax year. Individuals that will likely be caught by the tapered annual allowance may find this useful. However, the 2015/16 transitional rules are likely to give many advisers a headache as they get their heads around the rules in order to work out if opportunities exist for their clients. Further information John Dunn Pension Specialist Technical Support Unit Please contact the Technical Support Unit with any further queries on: Pension Technical Support: pensions.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHSTT 01 JUL15 LD 8