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The financial year end is approaching once again and like a game of swing ball if you turn your back for a second you could get a nasty shock.
This year pensions are particularly in focus as the ability to carry forward a £50,000 gross contribution allowance applies for the very last time (that is unless there is an increased allowance in the future). This makes the maximum unused contribution possible £170,000.
From 6th April 2017, the annual allowance at £40,000 will apply to the new financial year and for previous year’s carry forward calculations. This means a reduction in the pension contribution tax relief available of up to £4,500.
Unfortunately, that is not the end of the potential loss of relief for high earners as the tax year 2016/2017 also saw the introduction of tapering the annual allowance for anyone with “adjusted” earnings in excess of £150,000 per annum. In fact, this can affect anyone earning more than the “threshold income” level of £110,000 per annum. The calculations require all taxable sources of income to be added together including ‘benefits in kind’ (P11d items such as medical benefits, company cars) and investment income (such as rental income, dividends and interest received). For those with resultant earnings over £150,000, any pension contributions (including salary sacrifice arrangements) are also taken into account. The maximum reduction in the annual allowance is £30,000 which reduces the gross annual allowance to just £10,000.
In a separate measure, any clients that have already taken income from their pension arrangements under Flexible Access Drawdown or taken an Uncrystallised Funds Pension Lump Sum also faced a reduced opportunity for future pension contributions from 6th April 2016. This introduced a Money Purchase Annual Allowance (MPAA) of £10,000 gross per annum. However, the Autumn Statement detailed plans to reduce this further to £4,000 from 6th April 2017. Given that unused MPAA cannot be carried forward and that, having heard nothing to the contrary, we must assume that this is going ahead – it really is a case of use it or lose it!
Finally, there is at least some good news! Pensions are still the only investment wrapper that provides an immediate 25% return on investment in the form of basic rate tax relief, along with higher and additional rate tax relief via self-assessment. Currently, there are no provisions within legislation for this to change. With the diverse investment options that are available, no income or capital gains tax within the fund and flexibility around how benefits are taken (including 25% of the fund completely free of tax), a pension really is hard to beat as a long-term savings account.