View more on these topics

Tax year-end planning for annual allowance

Last tax year-end there was a lot to think about in relation to planning. The introduction of the tapered annual allowance and the implications of moving to a fixed pension input period, the reduction in the lifetime allowance and potentially applying for protection, and the concern about changes to tax relief, to name a few. This year we don’t have a reduction in the lifetime allowance but are the same issues still relevant? Clare Moffat, senior technical manager at Prudential, explores.

Most of these issues are still very relevant and are areas that need to be considered. In this article, I’ll also examine how they affect our Planning Matters family members.

Using or saving your annual allowance

Do any of your clients have unused annual allowance? If any unused annual allowance from 2013/14 is not used up before 6 April 2017, it will be lost. To make use of prior years’ unused allowance requires that the current year’s allowance is used first. This means carry forward is only appropriate for clients with relevant income over their 2016/17 annual allowance (unless the contribution is made by an employer, as employer contributions are not limited by the individual’s relevant income).

From 6 April 2016, all pension input periods have been aligned with the tax year (6 April–5 April). However, for pension input periods ending in the 2015/16 tax year, special transitional arrangements were made. Before that, pension input periods may not have been aligned to tax years, and knowing this is of vital importance when working out carry forward.

The introduction of the tapered annual allowance may mean that it’s a good idea to use up any unused annual allowance from 2013/14 in the 2016/17 tax year to soften the blow of the taper. However, for people who expect to breach their tapered annual allowance in the future, perhaps they could retain any unused allowance from 2014/15 and 2015/16 to offset potential tax charges in future years.

In David’s Planning Matters case study, he was considering making a large employer contribution, which would be efficient from a corporation tax point of view. However, the large pension contribution was using up carry forward from the current year and the previous three years, including 2013/14. Therefore, if he wants to make this employer contribution and avoid an annual allowance tax charge, it needs to be cleared before 6 April 2017 to save losing his carry forward from 2013/14.

The potential reduction in the money purchase annual allowance (MPAA)

You may have clients who have triggered the MPAA and have been paying in contributions of more than £4,000. The Government announced at the Autumn Statement that it intended to reduce the MPAA to £4,000 on 6 April 2017 and there is currently a consultation investigating the impact of this.

This means that, if you have clients who have triggered the MPAA and made contributions of less than £10,000, it may be appropriate to make contributions up to £10,000 before 6 April 2017. However, moving into the 2017/18 tax year, if you have clients who have triggered the MPAA and are making regular contributions in excess of £4,000, they should review their contribution levels.

The MPAA trigger date has been important since the introduction of the MPAA but this will be even more crucial if the MPAA reduces to £4,000. Essentially, the MPAA applies when a client flexibly accesses their pensions. Bear in mind that a £40,000 overall annual allowance still applies for clients and it is only defined contribution inputs that are limited.

Taking pension benefits under the small pots rules will not trigger the MPAA, nor will solely taking the pension commencement lump sum on a pot designated for flexi access drawdown. The MPAA only triggers when an income is taken from flexi access drawdown. Additionally, if a client has a capped drawdown plan you can, dependent on scheme structure, actually designate further funds towards the plan and, provided that you keep the income within the GAD limits, this will not trigger the MPAA.

Taking a small uncrystallised fund pension lump sum or a small income from drawdown may seem sensible and may be necessary at that time. However, it is essential to consider whether the client may want to fund contributions of more than £4,000 in the future. Perhaps another funding vehicle could be used?

Returning to the Planning Matters family, Gavin finished his last contract in August 2016. Part of his case study was investigating how he could take his retirement income after making a large final contribution. One of the options was taking income from drawdown. If he went down this route, he would trigger the MPAA. Although it looks like Gavin might want to actually stop working, if he changed his mind and decided to start a new contract, he would be limited to the MPAA in force at that time. Definitely one for Gavin to consider when looking at the various retirement income options.

Tax relief

The talk about changes to tax relief has died down for a bit, but it’s well known that the Government has been thinking about this. What would a change to tax relief mean? Last year there was discussion of a flat rate, but this year there also seem to be discussions around potentially having different tax relief for different ages. What does this mean now?

Any change to tax relief is unlikely to be better than the current system. Therefore, if you’re a higher- or additional-rate taxpayer, it may be wise to make pension contributions before the last spring budget in March 2017. If the chancellor did make a change, it could be with immediate effect with anti-forestalling provisions.

There’s another reason to make contributions before the end of the tax year and that is to make sure that pension contributions help you out of any tax traps.

In Margaret’s Planning Matters case study she was in the position where she wanted to use the normal expenditure out of income exemption, to make pension contributions for family members. She has many grandchildren and paying pension contributions for them could give them a much better retirement. However, Margaret is also going to make pension contributions for her daughter, Jane. Jane has recently gone through a divorce but she is unfortunately stuck in the child benefit tax trap at a time when family funds are low. When Margaret makes the contribution it reduces her estate subject to IHT, Jane receives the pension contribution that helps her retirement income need, and she can also claim her higher-rate relief.

The icing on the cake is the fact that this pension contribution takes Jane out of the child benefit tax trap. Margaret has been waiting for the divorce to be finalised before she writes the cheque and this has now happened. Making the pension contribution before the end of the tax year means this efficient tax planning on a family basis can save the family money now and in the future, and Jane won’t have a child benefit tax charge for 2016/17.

John, another member of our Planning Matters family, may also be thinking about making a large pension contribution if he decides to go ahead with the defined benefit transfer that we explore in his case study. This needs to be before he stops working so he has relevant earnings. This would be sensible as John is caught in the high earner’s tax trap (reduction in personal allowance for those with income in excess of £100,000) and therefore paying 60 per cent tax. A pension contribution to remove him from the tax trap would mean 60 per cent tax relief. However, those caught in the high earner's tax trap, and who are in defined benefit schemes in the pension input period like John, have to be mindful of the fact that the tapered annual allowance might apply and take this into account in any calculations.

Salary vs dividend vs pensions

The change in dividend taxation meant that company owners taking dividends in the higher-rate tax band would pay more in tax this tax year than last tax year. A combination of a low salary and dividends may still be the most efficient way to extract money for day-to-day spending, but taking more money out than is needed isn’t tax efficient, as shown below.

This table assumes that the £5,000 zero rate of taxation for dividends has been used up and the amount that will reach the individual’s bank account if withdrawn via dividends after corporation tax and personal income tax liability against pensions being used (25 per cent tax-free cash taken, with the remainder taxed in the relevant banding).

Salary Dividends Pensions
Basic rate 59.75% 74.00% 85.00%
Higher rate 50.97% 54.00% 70.00%
Additional rate 46.57% 49.52% 66.25%

In David’s Planning Matters case study, he was taking most of his remuneration from his business through a mixture of a higher salary and a lower amount of dividends. However, David could reduce his salary to the minimum needed for state benefits, increase the dividend taken to use up the rest of the basic-rate band, and then make an employer pension contribution of the maximum possible to scoop up all his unused annual allowance (currently £170,000 if using annual allowance for this year and the three previous years). This would mean that employer and employee NI is saved, tax is substantially reduced and the amount actually in David’s hand only reduces by around £7,000. Plus £170,000 in the ‘future’ bank account. If extracted at basic-rate tax on retirement, he will only lose 15 per cent of that £170,000 to tax. A win-win!

Annual planning decisions

Every year, your client’s individual circumstances must be considered to decide whether there are planning opportunities to be taken advantage of before the end of the tax year. This is even more important if a client’s circumstances are about to change. Our Planning Matters family members all have different planning considerations but pensions are a very tax-efficient wrapper and should be considered. It’s also crucial to make sure that clients are aware of areas that may change in the new tax year.

View more about tax year-end planning in Prudential’s latest Oracle

Take a look at the case studies on the Prudential Planning Matters hub


Tax year-end planning with the family

From the Technical team at Prudential Let’s face it, many aspects of financial planning involve a lot of technical detail. At our face-to-face events, we’ve had great success bringing these technical topics to life through the use of practical case studies. Meet the family Prudential’s Planning Matters hub brings together a fictional family and explores […]


John Lawson: New tax planning ideas for advisers

January heralds the start of tax-year-end planning. Alongside the well-established ideas, advisers should explore some new areas this year: The money purchase annual allowance: The MPAA falls from £10,000 to (a proposed) £4,000 from 6 April. Clients who want to pay in the higher amount before the tax-year end should do so now, as carry […]


Rating the robos: Ian McKenna launches robo-advice review service

Advisers will have access to independent reviews of 20 robo-advisers through a new service from the Finance and Technology Research Centre. The service, called Digital Wealth Insights, will add a further five to 10 reviews of robo-advisers each month. The 20 firms are broken down into non-advised investment, advised investment, personal financial managers, and microsavings […]

Tracey McDermott FCA 700x450.jpg

Ex-FCA chief to join Standard Chartered

Former acting FCA chief executive Tracey McDermott will join Standard Chartered as its head of corporate, public and regulatory affairs. According to the Financial Times, McDermott will join the bank’s management team as it pushes ahead with a plan to turn around its performance through cost-cutting measures including getting rid of $100bn of risky assets, […]

Help, I’ve been appointed as a trustee. What are my responsibilities?

Graeme Robb, Technical Manager at Prudential looks at the key duties and responsibilities of a trustee.  This article will consider the following: Duties to be performed on appointment Investment duties Protecting the interests of beneficiaries Keeping accounts and records Distributing property to beneficiaries Duties to be performed on appointment Obtain a copy of the trust […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm