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Paul Kennedy: Navigating pension input periods ahead of tax year end

Paul Kennedy

As the tax year end approaches, conversations will focus on whether and what to contribute to a pension before 5 April. This year has special rules for calculating the annual allowance and some added factors to be considered before using or carrying forward any unused allowances.

All pension input periods are to be compulsorily aligned to tax years from 2016/17 onwards and transitional rules apply, making this tax year more complex than normal. In brief, all open Pips were closed on 8 July 2015 and a compulsory new Pip runs from 9 July 2015 to 5 April 2016. This will create either two Pips ending in this tax year or three if one closed after 6 April and before 8 July 2015. For any new arrangement after 8 July 2015, the Pip also ends on 5 April 2016.

Mini pension tax years

There are then two mini pension tax years: the “pre-alignment” year and the “post-alignment” year. The former covers contributions made in Pips ending between 6 April and 8 July 2015. For many there will be just one Pip ending in this period but, as mentioned, there can be two. Remember, it is contributions made in those Pips, not simply contributions made between 6 April and 8 July. The allowance for the pre-alignment year is £80,000 (plus effectively any unused allowances carried forward from tax years 2014/15, 2013/14 an 2012/13).

The post-alignment year covers contributions made during the automatic Pip period 9 July 2015 to 5 April 2016. This period has zero allowance but up to £40,000 of any unused allowance from the pre-alignment year can be carried forward (plus effectively any unused allowances carried forward from tax years 2014/15, 2013/14 and 2012/13 not used in the pre-alignment year). For those not a member of a registered scheme in the pre-alignment year the allowance is £40,000.

Where subject to the inner money purchase annual allowance in the pre-alignment year, there is a maximum of £20,000 for money purchase within overall limits. Up to £10,000 of any unused amount may be carried forward into the post-alignment year, to operate within overall limits for that period. This operates as an exception to the normal rule that unused MPAA cannot be carried forward.

For defined benefit schemes there are special rules to calculate pension input. Simplistically, input is calculated from the start of the Pip that would have ended during the tax year 2015/16 through to 5 April 2016. The starting value is increased by 2.5 per cent rather than the normal CPI-linked increase, then the total input value is split proportionally into the two mini-years. The post-alignment year runs for 272 days, so its proportion of input value is 272 divided by total number of days in the input period. The pre-alignment proportion of input value is total days minus 272 divided by total number of days.

It is intended carry-forward will continue to apply from 2016/17 as currently: that is any unused annual allowance from the three previous tax years can be carried forward to the current tax year.

The carry forward for 2015/16 will be any unused amount from the pre-alignment year up to a maximum of £40,000 less any amount of that which was used in the post-alignment year.

In considering what allowance to use this tax year and what (if any) to carry forward for future tax years this year is, again, tricky. First, we may or may not see changes to pension tax relief in the upcoming Budget. Second, some clients may be affected by reduced annual allowances from 2016/17 onwards.

Individual circumstances

There is undoubtedly no absolute right or wrong and it will depend on individual circumstances but some general observations arise. Irrespective of available allowances, tax relief on individual contributions is restricted to annual net relevant earnings. Within that, one needs to consider contributions or part thereof that will attract only basic rate tax relief. This is a normal consideration but becomes more apposite if we see the advent of flat rate relief at higher than 20 per cent, whereupon it may have paid to wait.

Where clients are members of an employer’s scheme and it is likely the company contribution will exceed their future annual allowance (particularly where reduced or tapered) then carrying forward some allowance may counter any potential tax charge, at least for a few years.

Finally, there is the lifetime allowance, which may in itself limit the sensible size of contribution irrespective of the availability of annual allowances.

Aside some nuances, if one has the funds to make a contribution, has sufficient allowance and can obtain the requisite rate of tax relief it might be a case of why wait? Moreover, perhaps get it done before Budget day.

Paul Kennedy is head of tax and trust planning at FundsNetwork



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  1. Very useful piece especially as HMRC have not updated their material.

    If you go to the Pensions Tax Manual and look up the section on Input Periods (dated 14 December 2015) PTM 052000, it tells you about changing input periods but nothing at all on the post July budget rules

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