Pension planning opportunities ahead of the 5th April 2017 Tax year-end

  1. Claim higher rate tax relief on pension contributions

From 6 April 2016 the standard annual allowance (AA) of £40,000 for pension contributions (the total of personal and employer contributions) is reduced by £1 for every additional £2 of an individual’s ‘adjusted income’ over £150,000, if the individual’s ‘threshold income’ exceeds £110,000. This means that the minimum AA will be £10,000 for individuals with annual income of £210,000 or more, but tax relief at your top rate of tax is still available on contributions up to your annual allowance.

Adjusted income is the total gross taxable income from all sources, plus employer pension contributions, and before any deductions. Threshold income is the total gross taxable income from all sources, less any pension contributions made.

Unused AAs in 2013/14, 2014/15 and 2015/16 can be brought forward and used in 2016/17. Only the 2016/17 AA is reduced so, in theory, an individual could make total contributions of up to £170,000 but higher rate tax relief would not be obtained on the full amount. Individuals with income of £290,000 or more would have their annual allowance for 2016/17 reduced to £10,000, but if they had the maximum unused allowances brought forward, could get tax relief at 45% on contributions of up to £140,000. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief brought forward.

It is important to take advice on contribution levels because if the total contributions you make, or that are made on your behalf, exceed your available allowance (including any unused relief brought forward), a tax charge will arise effectively withdrawing tax relief on the excess contribution.

Lifetime ISAs are being introduced from 6 April 2017 and some are predicting that this could lead to the abolition of higher rate tax relief on pension contributions – a regime that may not sit well with the Government’s new policy of “making the economy work for all”. Therefore, higher and additional rate taxpayers should consider maximising contributions in 2016/17 (and possibly before the 2016 Autumn Statement from the new Chancellor) to utilise full tax relief whilst it is available.

  1. Protect a large pension pot

Although funds invested within a pension can grow tax free, there is a limit (the lifetime allowance – LTA) on the total amount you can hold in a pension pot: funds in excess of the limit will suffer penalty tax charges when you start to take pension benefits.

Individuals with large pension pots should note that the LTA reduced from £1.5m to £1.25m from 6 April 2014. It is too late to elect for ‘fixed protection 2014’ but affected individuals can still elect for ‘individual protection 2014’ (IP14) to preserve their individual LTA at the lower of £1.5m, the actual value of their pension fund at 5 April 2014 or the standard LTA (i.e. £1.25m in 2014/15). However, the deadline for making the election is 5 April 2017.

If the total of all your pension funds exceeded £1.25m at 6 April 2014, you should seek urgent advice on whether opting for IP14 is appropriate.

Similarly, the LTA reduced from £1.25m to £1m from 6 April 2016. As before, affected individuals can now elect for ‘individual protection 2016’ (IP16) to preserve their individual LTA at the lower of £1.25m or the actual value of their pension fund at 5 April 2016. If the total of all your pension funds is likely to be at or near £1m by the time you retire, you should seek advice on whether opting for IP16 is appropriate. As with previous reductions, individuals can also preserve the earlier £1.25m LTA by opting for ‘fixed protection 2016’ (FP16) but all pension contributions must stop.

The only deadline for applying for FP16 or IP16 is that the election must be made before you start drawing pension benefits. Individuals with a pension fund that already exceeds £1m (or is expected to by the time they draw benefits) should seek expert advice on their options. Whether you should opt for FP16, IP16 or both will depend on your circumstances, retirement intentions and fund growth expectations.

The Government announced that the LTA will increase in line with the Consumer Price Index each year from April 2018.

  1. Pensions for all

Stakeholder pensions allow contributions to be made by, or for, all UK residents, including children.

So consider making a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even for those who do not have any earnings.

You can also make pension contributions in respect of family members who do not work (i.e. have no relevant earnings) or cannot afford them.

For example, if you have children who have lost child benefit in respect of your grandchildren you may be able to help.

If you make contributions to your children’s pension schemes on their behalf, they get the tax relief and the payments are treated as reducing their taxable income – so it could help keep them below the £50,000 income threshold at which they can retain the child benefit.

The earlier that pension contributions are started the more they benefit from compounded tax free returns.

For example, provided the pension investments grow at a net rate of 9% every year, investing £2,880 a year for your 10 year old child could build the maximum allowable pension pot of £1m by the time he or she reaches age 68.

  1. Make tax free pension contributions

For employees, particularly those paying basic rate tax, pension contributions made by your employer are tax-efficient as there is no tax to pay on this benefit and the employer can claim a business tax deduction. If you own the company, this can be a tax-efficient way to extract value.

It is often worth setting up arrangements where employees exchange some of their salary in return for a larger pension contribution made by the employer. This saves on NIC that would have been paid by both employer and employee and the savings can be passed on as higher pension contributions. However, for 2016/17 and later years, this may not be effective for high earners.

For individuals with a net income of £110,000 or more, pension contributions made on their behalf by employers will be added back to establish whether or not tax relief on contributions should be restricted because their gross income exceeds £150,000. Care should be taken to avoid incurring an annual allowance charge.

As always we would be delighted to discuss any of the above with you.

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