Annual allowance | Pensions and Retirement | Personal | Zurich Insurance

Annual allowance 2017

You may have heard that the Government is making changes to the annual allowance that will see it reduced for high earners from 6 April 2017.

The following Q&As explain what the annual allowance is, when your allowance could be reduced, and what to do if you exceed your allowance.

What is the annual allowance?

In broad terms it’s the maximum that can be paid into all your pension plans in pension input periods (PIPs) ending in the same tax year without a tax charge applying. If total payments (including those from your employer) to all your pension plans are over this allowance, the excess is subject to a tax called an ‘annual allowance charge’. The annual allowance is currently set at £40,000 unless the tapered annual allowance applies to you.

Pension credits and transfers from other pension arrangements do not count towards the annual allowance. Pension payments up to 100% of salary are still permitted and will still receive tax relief, but if this is higher than your annual allowance, an annual allowance tax charge will be applied to the excess amount.

What is a 'pension input period' (PIP)?

A PIP is the period over which pension contributions are measured against your annual allowance. It is the end date of the PIP that determines which tax year your pension savings are tested against.

Since 6 April 2017, the PIP is aligned with the tax year (6th April - 5th April in the following year). Before this change, the PIP could have been a rolling 12 month period that started when your first contribution was paid into you plan, or may already have been aligned with the tax year. There was a transition into the new regime. You should speak to your financial adviser if you would like to understand how this transition affected you.


Can I change my PIP?

No. The Government has now removed the option to change the end date for a PIP.

Reductions to the annual allowance

Could my annual allowance be lower than £40,000?

Yes, if you are a high earner and the tapered annual allowance applies to you.

Under new rules from 6 April 2016, if you meet the Government criteria for a high earner, you could also see your annual allowance tapered down from £40,000 but not below £10,000.

In addition if you’ve taken benefits from a pension plan using the new freedoms introduced in April 2015, you might have triggered the money purchase annual allowance (MPAA). The MPAA is the limit on the amount of payments that can be made to all your money purchase pension plans each year, without incurring a tax charge. The MPAA is currently £10,000.

What are the money purchase annual allowance (MPAA) and alternative annual allowance?

Certain pension benefit payments trigger the MPAA. This limits the tax relief you can get on future savings to any money purchase pension plan. If you trigger MPAA, then you will have a £4000 annual allowance for defined contribution pension savings.

If you exceed this £4000 limit, you’ll have (in addition to the £4000 defined contribution annual allowance) a reduced £36,000 annual allowance for your defined benefit pension savings. This is the alternative annual allowance.

If you do not exceed the £4000 limit, you will retain the normal £40,000 annual allowance for all your pension savings.

What is the tapered annual allowance?

It is a lower annual allowance that applies to you if you are classed as a high earner. If you are a high earner the amount of the annual allowance is reduced and the amount it is reduced by depends on the level of your income.

How do I know if I qualify as a high-earner for the tapered annual allowance?

Taking a simplified view, the tapered annual allowance is likely to apply to you in any tax year in which:

  • Your total income is in excess of £110,000. Any salary sacrifice in return for pension provision set up on or after 9 July 2015 will count as income for this purpose. This is called your Threshold Income

    AND

  • Your total income including the value of any pension contributions is greater than £150,000. This is called your Adjusted Income

This and the summary below is only a broad overview of how threshold and adjusted income are calculated. The full process is more complicated than this, and we strongly recommend speaking with your financial adviser if you think you could be impacted.

How do I calculate my Threshold Income?

This is a simplified summary of what is included within threshold income. If you think you’re affected by the tapered annual allowance, we strongly recommend you speak to a financial adviser.

You need to take your total income for the tax year; this could be things like any salary, bonuses, pension income, income from property, savings, or dividends.

From this, you can deduct certain reliefs allowed for under income tax rules, and the value of any contributions being made by an individual to a relief at source pension plan (e.g. a personal pension plan). You can also deduct the value of any lump sum death benefits received from a pension if these were subject to income tax.

You then need to add on the value of any pension contributions made as a result of a salary sacrifice (also known as salary exchange) if the arrangement was entered into on or after 9 July 2015.

If this comes to more than £110,000 then you could be affected by the tapered annual allowance if your adjusted income is also over £150,000.

How do I calculate my Adjusted Income?

This is a simplified summary of what is included within adjusted income. If you think you’re affected by the tapered annual allowance, we strongly recommend you speak to a financial adviser.

You need to take your total income for the tax year; this could be things like any salary, bonuses, pension income, income from property, savings, or dividends. From this, you can deduct certain reliefs allowed for under income tax rules. You can also deduct the value of any lump sum death benefits received from a pension if these were subject to income tax.

To this, you need to add the value of any pension contributions being made by you by deduction from gross employment income (net pay arrangement) and pension contributions made by your employer, on your behalf.

If this comes to more than £150,000 and your threshold income is more than £110,000, then you could be affected by the tapered annual allowance.

If I’m affected by tapering, how much will my annual allowance be reduced by?

For every £2 of your adjusted income over £150,000, your Annual Allowance will be decreased by £1, up to a maximum reduction of £30,000. The table below gives more information. 

Adjusted Income    Tapered Annual Allowance in 2016/17 tax year
£150,000    £40,000
£160,000    £35,000
£170,000    £30,000
£180,000    £25,000
£190,000    £20,000
£200,000    £15,000
£210,000 and above    £10,000

What happens if my pension contributions exceed my tapered annual allowance? 

If you are affected by this and your total payments to all registered pension schemes are above your tapered annual allowance, you may be liable to an annual allowance tax charge on the excess contributions unless you have unused allowances from the previous three tax years.

If your total payments are above your tapered annual allowance, you’ll also need to declare the excess in your self-assessment tax return.

Can I be subject to the tapered annual allowance if I’m already subject to the money purchase annual allowance (MPAA)?

Yes if you are subject to the MPAA, the alternative annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. The carry forward of unused annual allowance will continue to be available, but the amount available will be based on the unused tapered annual allowance.

If you are subject to both the MPAA and tapered annual allowance, we suggest discussing this with your financial adviser.

What if the allowance is exceeded?

Can unused annual allowance from previous tax-years be carried forward?

Unused annual allowance can usually be carried forward from the past three tax years.

Going forward, for any tax year where your annual allowance was reduced as a result of tapering, you’ll only be able to carry forward the unused balance of the tapered amount.

If you’ve triggered the money purchase annual allowance, you may be able to carry forward unused annual allowance from the three previous tax years, but you won’t be able to use it to increase the amount you can pay into money purchase pension plans above £10,000 a year.

How much is the annual allowance tax charge?

It will be based on the current rates of income tax that apply to you. Simply put, the charge aims to offset tax relief received on pension savings that are more than your available annual allowance.

How do I find out if I have to pay the annual allowance charge?

Individuals are responsible for finding this out.

The charge applies to payments to all pension arrangements, not each separate arrangement. Administrators of each scheme can provide payment details to help calculate an overall payment amount.

Where payments exceed the annual allowance, schemes have to provide information to members within six months after the end of the tax year to which the information relates.

Who is responsible for paying the annual allowance charge?

You are, with payment made through a self-assessment tax return. In some circumstances, you may be able to ask your pension provider to pay the tax charge to HMRC from your pension plan.

Is there any form of protection from the annual allowance charge for existing patterns of payments?

No.

Is there any way I can alter the tax charge, for example by undoing the pension payment?

No.