Govt moves to block annual allowance taper loopholes

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People trying to dodge the taper on the pensions annual allowance could be caught by new anti-avoidance measures proposed by the Government.

Details of how the annual allowance taper will work have been published in the first draft of the Finance Bill.

Last week the Chancellor confirmed people with “adjusted incomes” over £150,000 will see their annual allowance begin to drop from £40,000 to a minimum of £10,000 for those with income over £210,000.

In the Finance Bill the Government sets out new rules to combat savers avoiding extra tax charges by deliberately reducing earnings in a tax year or using salary sacrifice.

An explanatory note says the measures will “prevent individuals entering into a salary sacrifice or flexible remuneration arrangement on or after 9 July 2015 in order to reduce their threshold income.”

It adds: “Where this applies, the amount of income given up is added back to the individual’s threshold income.”

Adjusted income is defined as the individual’s net income plus pension contributions, less relief on contributions and certain lump sum death benefits, in a tax year.

Savers below the threshold income will not be affected by the taper.

Threshold income is calculated as adjusted income less the annual allowance, meaning it will be £110,000 in 2016/17.

Talbot & Muir head of pensions technical Claire Trott says: “Although this adds further complications to the calculations it does make it clear that those who should be caught by these measures cannot avoid them if they have the flexibility to move or sacrifice income within their contracts. If this hadn’t been put in place then the measures would be unfair to those with less flexible arrangements who couldn’t avoid being hit.”

But she warns savers will struggle to know how much they can contribute in a year.

She says: “Many people will be unaware of what bonus they may be getting late in the tax year. If there is a danger this may take them over the threshold amount then they will have to either risk that their contributions will be in excess of their reduced allowance and possibly pay an excess charge, or delay contributions altogether.

“Delaying contributions may mean losing them entirely if their employer isn’t flexible enough.”