THE subject of pension provision and tax liabilities are intertwined as never before following the continued reduction of the Annual Allowance for pension contributions, as well as the commencement of a tapered allowance for those with “adjusted” annual incomes in excess of £150,000.
As ever with tax and pensions, it is not straightforward: the way you calculate your adjusted income to see if the taper applies is unique. First of all, you have to look to see if your “threshold” income is below £110,000. This is your taxable income plus/less certain items specified by the legislation. If it is, then no further action is needed and you are not subject to the taper.
However, if your “threshold” income is above £110,000, then you have to add onto this figure your employer’s share of the growth in your pension pot for the year. (Please note that this is the growth figure and not the amount of contributions made.) This figure can only be ascertained once you receive your “Annual Allowance Pension Savings Statement.” If the total of your “threshold” income and the employer’s growth exceeds £150,000, then you are liable to the taper.
This tapered allowance applies from the 2016/17 tax year which means it affects the tax returns we will shortly be preparing for you as well as the tax payment due on 31 January 2018. The Annual Allowance of £40,000 is tapered by £1 for every £2 of income above the £150,000 limit until it is £10,000 only:
Extracted from: https://www.pruadviser.co.uk/content/knowledge/technical-centre/annual_allowance/ on 29 June 2017
The increase to the tax bill could be significant, depending on your personal circumstances.
However, it may be possible to elect for some or all of the resulting tax payments (as long as they are over £2,000) to be paid out of your pension pot and means that you personally have no immediate liability. This is called “Scheme Pays,” and the deadline for electing for this treatment is 31 July in the calendar year after the end of the tax year. So the deadline fast approaching on 31 July 2017 relates to the 2015/16 tax year.
However, the intricacies of the rules means that, if the extra tax charge is due to the tapering of the Annual Allowance, then the “Scheme Pays” may not pay all of the resulting tax charge, leaving you to fund some or all of the extra tax.
You have until 31 July 2018 to decide whether to elect for “Scheme Pays” for the 2016/17 tax year.
To help us to help you review your tax and pension contribution liabilities we really need you to send to us upon receipt any and all letters received from the NHS Pension Agency, in particular the letter headed “Annual Allowance Pension Savings Statement.” These are usually issued any time after September.
However, the decision to elect for “Scheme Pays” is not straightforward; a decision to aid your short term cashflow – by reducing your tax bill – will have long term effects on your pension pot at retirement and therefore on the amount of your pension and tax free lump sum. We very strongly recommend that you take financial advice before making your final decision.
The changes in tax law and pension law are not straightforward – even the vocabulary can be complicated! – so it is important that you talk to people who know / what it means for you.
Get in touch with us on 0191 281 8191 for knowledgeable advice.