High earners need to be aware that, from April 2016, the rules around how much they can pay into their pension is changing, potentially by a significant amount.
There is no limit to the amount an individual can pay into their pension but there is a limit on how much tax relief is available.
Currently, the annual allowance is £40,000 meaning that anyone with earnings to support such a payment could invest up to this amount into their pension and receive valuable tax relief. It is possible to ‘carry forward’ unused relief from previous tax years allowing larger contributions to be made.
From April 2016, those with income in excess of £150,000 will see the £40,000 allowance reduce by £1 for every £2 of earnings up to £210,000. This will result in people earning in excess of £210,000 only being able to contribute a maximum of £10,000 per annum without paying a tax charge.
The two main points to think about are:
What constitutes earnings?
The figure being used is called the ‘adjusted income’. This includes salary, bonus, benefits in kind, pension income, income from property, savings and dividends. The main difference between this and other calculations of income is that it also includes both employee and employer pension contributions.
Is there an opportunity to make a large contribution before losing the ability?
Should an individual with a high income have unused relief from previous tax years then now would be the time to make a payment as from April 2016, the amount available will reduce.
Don’t leave it too late…
There is the possibility that the tax relief available on pension contributions will change too. Currently tax relief is given at the individual’s highest marginal rate with basic rate tax payers receiving 20% relief, higher rate tax payers 40% relief and additional rate 45% relief. Many commentators are suggesting that a flat rate level of tax relief may be introduced from the next budget, which is likely to be in the region of 30 – 33%. This will obviously benefit basic rate tax payers but will be to the detriment of higher rate and additional rate tax payers.