Most enquiries received by our technical team in recent weeks have been around the need to maximise contributions for high earners prior to the end of the tax year and as a precaution ahead of the Budget.
The reason for the activity circles around the incoming tapering of annual allowance for those with adjusted earnings of £150,000 and above, for whom the last year during which they can make use of their £40,000 annual allowance is rapidly approaching.
Often misunderstood is the definition of adjusted income, which will include not only the usual earnings plus bonuses and benefits in kind but also items that previously were not associated with net relevant earnings, such as property rental income, interest on savings and dividends.
Any pension contributions must also be added back into the mix. Given there appears to be limited scope to mitigate the tapered annual allowance, it seems this new definition will affect more clients than envisaged, which has contributed to the end of tax-year rush.
What is even more challenging is that it is unlikely the actual level of adjusted income will be known with any certainty, meaning the planning of contributions and checks against the individual’s annual allowance are unlikely to be close to certain until near the end of the tax year.
What we can be certain of is that carry forward can be utilised this year for individuals who were members of registered pension schemes for the previous tax year from which the allowances are intended to be carried forward. This could, again, be a last-chance opportunity for many, as failure to use the carry forward allowances this year will mean any amount taken up by corporate contributions next year will be added back into the client’s adjusted annual income.
The earliest tax year from which allowances can be carried forward – 2012/13 – also had the higher £50,000 annual allowance and falls out of the three-year frame from April.
Carry forward calculations have been complicated somewhat by the changes in pension input periods last July. Advisers will need to know not only how much has been contributed in the current tax year but the dates these contributions were paid and the Pip of the vehicle into which they were paid.
Next, of course, is the reduction in the lifetime allowance to £1m. With successive reductions, this arbitrary limit, after which an LTA tax charge of 55 per cent applies as benefits are drawn, will now catch a greater number of clients.
As such, those with potential to breach limits are looking towards Fixed Protection 2016, which, while providing the higher LTA of £1.25m, also prohibits any further pension contribution or benefit accrual after 5 April 2016. Advisers should ensure any applicants are made aware ahead of time to ensure no contributions are made that could disqualify the application.
Last but not least is the threat to tax relief itself. A definitive statement is due at the Budget. For higher earners, the door to pension savings might be swinging shut.
Martin Tilley is director of technical services at Dentons Pension Management