High earners should act fast to maximise on tax-free pension perk
From April 2016 new rules will cut the amount high earners can save while still attracting tax relief.
These rules impose a taper designed to gradually reduce the amount people with incomes between £150,000 and £210,000 can save, tax-free, into pensions each year. At present, the standard annual allowance is £40,000. Under the new rules, however, where the saver’s income exceeds £150,000, this limit will ratchet down to just £10,000 for those earning £210,000 or more. If the limit is exceeded, 45% tax will apply.
As these changes are applicable until the 2016/17 tax year, high earners have a window of opportunity. Under the carry forward rules, there is further scope to use up any unused relief from the previous three tax years. Potentially this can be a further £140,000 in addition to the current year’s allowance.
The amount you can pay in will depend on what you earn and how much you’ve already contributed into pensions, and whether there is scope for your employer to make further contributions on your behalf.
The Government believe this change will save around £1 billion pounds a year in tax relief benefits.
As part of the ongoing reforms, they will also be realigning PIP’s (Pension Input Periods) for people’s individual annual allowances to coincide with the tax year. This has given rise to a transitional period for 2015/16 whereby two PIP’s have been created: April 6-July 8, and July 9-April 6. So anyone who has already contributed up to £40,000 into a pension during the period 6 April 2015 to July 8 2015, gets another chance to put in a further £40,000 in 9 July – 5 April 2016 as well. Therefore how much you might benefit from this quirk is likely to rest on the timing of your payments in the current tax year.
We would advise you to seek Independent Financial Advice if you believe you could benefit from this opportunity, or will be earning in excess of £150,000 in the next tax year. Time is of the essence here, and we predict pension providers to incur a large influx of requests as the window of opportunity begins to close. Please do not hesitate to give our Hove office a call on 01273 208813 if you would like some advice in this area, or with pensions in general .