TAX RELIEF AND THE ANNUAL ALLOWANCE

LEARNING

At the end of this session you’ll have an understanding of:

• the rules on tax relief and how much is available

• the relationship between the annual allowance and tax relief

• what triggers the Money Purchase Annual Allowance

• how to calculate the annual allowance when the taper applies

• how to calculate unused annual allowance using carry forward.

OBJECTIVES

TAX RELIEF ON CONTRIBUTIONS

• Employer contributions – paid gross

• Member contributions – relief at source or net pay arrangement

MEMBER CONTRIBUTIONS

• Relevant UK individual

• Gross contributions don’t exceed the higher of £3,600 p.a. and 100% of relevant UK earnings over the tax year

CONDITIONS FOR TAX RELIEF

MEMBER CONTRIBUTIONS

• Applies to non-occupational schemes

• Basic rate tax relief added to net contribution

• Any higher rate tax relief claimed via self-assessment

RELIEF AT SOURCE

EXAMPLE TAX CALCULATION

Income band Tax

Personal allowance

£11,850 £0

Basic rate tax £34,500 £6,900

Higher rate tax £1,000 £400

Total tax £7,300

A client with taxable income of £47,350

EXAMPLE TAX CALCULATION

Income band Tax

Personal allowance

£11,850 £0

Basic rate tax £35,500 £7,100

Higher rate tax £0 £0

Total tax £7,100

After paying a £1,000 pension contribution

EXAMPLE TAX CALCULATION

Income band Tax

Personal allowance

£11,850 £0

Basic rate tax £35,500 £7,100

Higher rate tax £0 £0

Total tax £7,100

After paying a £3,000 pension contribution

MEMBER CONTRIBUTIONS

• Only available to occupational schemes

• Gives tax relief at the member’s marginal rate immediately

NET PAY ARRANGEMENT

ANNUAL

• £40,000 for those with taxable income of no more than £150,000

• Measured over the pension input period (PIP)

• Can carry forward unused annual allowance

ALLOWANCE

MONEY PURCHASE

• Is currently £4,000

• Applies to money purchase (DC schemes) only

• Is triggered by certain events

• Carry forward is unavailable

ANNUAL ALLOWANCE (MPAA)

MPAA

• Taking income from a capped drawdown plan that exceeds the GAD limit

• Receiving a lump sum from uncrystallised funds (UFPLS)

• Taking income payments from a flexi-access drawdown plan

THE TRIGGERS

WHAT WON’T

• Receiving PCLS only

• Taking a ‘small pot’ lump sum

• Trivial commutation

• Taking income from a capped drawdown plan that’s within the GAD limit

• Additional fund designation to an existing capped drawdown plan

• Buying a lifetime annuity

TRIGGER MPAA

MPAA

• John has triggered the MPAA

• He pays contributions to DC schemes of £3,000.

• And has £37,000 AA left meaning an additional £1,000 could be paid to DC schemes.

• If John paid contributions of £6,000 to DC schemes, an AA charge on the £2,000 excess would apply and there would be £36,000 of AA available for DB schemes. HAS T

VERSUS AA

THE PENSION

• From 8 July 2015 all PIPs have been aligned with the tax year

• Earlier PIPs may not be aligned with the tax year

INPUT PERIOD

Relates to pension input periods (PIPs) ending in the relevant tax year:

April 2012

April 2014

April 2015

April 2013

£50K £40K

2 March 2013 1 March 2014

pension input amount

Total contributions to all pension arrangements

DEFINED CONTRIBUTIONS

SUMMER

• Ensured that all PIPs aligned with the tax year, with effect from 8 July 2015

• Introduced transitional arrangements to ensure the change didn’t disadvantage anyone

• Provided for a reduced annual allowance for those with taxable income of over £150,000 from 6 April 2016

BUDGET 2015

PIP 1 PIP 2 PIP 3

1/6/14 31/5/15 1/6/15 8/7/15 9/7/15 5/4/16 6/4/15

2015/16 tax year

TRANSITIONAL ARRANGEMENTS

EXAMPLE

PIP 1 PIP 2 PIP 3

1/6/14 31/5/15 1/6/15 8/7/15 9/7/15 5/4/16 6/4/15

2015/16 tax year

£30,000 £10,000 Option to pay another £40,000

THE PENSION

• Contributions (DC schemes)

• Value of pension accrued (DB schemes)

INPUT AMOUNT

DEFINED

• Calculate the value of the pension accrued at the beginning of the tax year

• Adjust for inflation

• Calculate the value of the pension accrued the end of the tax year

• Deduct the adjusted opening value from the closing value

BENEFITS

TAPERING OF

• Effective from 6 April 2016

• Reduces annual allowance by £1 for every £2 by which adjusted income exceeds £150K

• Can’t reduce AA below £10K

• £10K annual allowance would apply where income is £210K or more

• Taper doesn’t apply where ‘threshold income’ doesn’t exceed £110K

ANNUAL ALLOWANCE

NET

• Total income liable for income tax, less

• Tax reliefs such as trading loss relief, share loss relief and payments to trade unions or police organisations, less

• Tax relief on making a claim

INCOME

DEFINITION OF

• individual's net income, plus

• any relief under the net pay system (i.e. it's added back in), plus

• any relief on making a claim (again, added back in), plus

• relief claimed by non-domiciled individuals to overseas pension schemes, plus

• the value of any employer contributions for the tax year but less

• any lump sum death benefits received which is subject to tax because the deceased died at age 75 or more.

If the final amount exceeds £150K, annual allowance reduced by £1 for each £2 excess

ADJUSTED INCOME

DEFINITION OF

• Individual’s net income, less

• any taxed lump sum death benefits received, plus

• any employment income given up for an employer contribution through a salary exchange agreement entered into on or after 9 July 2015, less

• the gross amount of any relief at source pension contributions paid

Threshold income limit is £110,000

THRESHOLD INCOME

EXAMPLE

• Mike earns £160,000 p.a.

• has investment income of £10,000 p.a.

• pays £8,000 p.a. pension contribution to his occupational scheme (net pay arrangement)

• employer pays another £8,000

What’s his annual allowance?

MIKE’S

Adjusted income:

• £160,000 (earnings), plus

• £10,000 (investment income), plus

• £8,000 (employer contribution)

= £178,000

Annual allowance:

£40,000 less

(£178,000 - £150,000) divided by 2

= £26,000

ANNUAL ALLOWANCE

MIKE’S

• £160,000 (earnings), plus

• £10,000 (investment income), less

• £8,000 (employee contributions)

= £162,000

Payment of a further gross pension contribution of £52,000 (£41,600 net) would reduce his threshold income to £110,000

THRESHOLD INCOME

THE ANNUAL

• Paid by the member

• Identified via the tax return

• Effectively removes tax relief

• Can be paid via the scheme

ALLOWANCE CHARGE

CARRY FORWARD

FIONA HANRAHAN JANUARY 2019

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CARRY FORWARD LEARNINGS POINTS

By the end of this session you will:

• know where people go wrong when doing

carry forward calculations and how to

prepare

• understand carry forward by working

though some case studies

• Know about the resources we have to help

and where to find them

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CARRY FORWARD WHERE DO PEOPLE GO WRONG?

• Get mixed up between annual allowance and tax

relief

• Get the PIPs wrong

• Forget about complications of 15/16 tax year

• Forget about taper or MPAA for 16/17, 17/18 and

18/19

• Don’t handle employer contributions correctly

• Don’t handle a previous carry forward correctly

• Get confused about eligibility for carry forward

• Try and do DB calculations themselves

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CARRY FORWARD WHAT DO YOU NEED IN ADVANCE?

• Eligibility for carry forward

• Current earnings (possibly 16/17 and 17/18 too)

• Contribution history from 15/16 onwards

• Correct split for 15/16

• Earlier detail if previous CF

• Use the table

CARRY FORWARD

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EXAMPLE 1 - SAM About Sam • Sam has his own limited liability company. • In 2018/19, he’ll pay himself a salary£5,000 • And dividends of £100,000.

• He took out a personal pension plan on 1

August 2012 and has been saving £1,200 per month in employer contributions ever since.

• He has no other retirement savings and wants to make a substantial single contribution before the end of the 2018/19 tax year.

• Sam wants to know how much he can contribute without triggering an annual allowance charge. He hasn’t triggered the Money Purchase Annual Allowance (MPAA) and the tapered reduction of annual allowance for people with high

• income doesn’t apply.

CARRY FORWARD

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EXAMPLE 1 - SAM

CARRY FORWARD

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EXAMPLE 2 - AMY

About Amy Amy is the Finance Director of a large manufacturing company earning £108,000 in the 2018/19 tax year. Her employer has been making single contributions into a group personal pension plan for her since 1 May 2010. She hasn’t been contributing herself and doesn’t have any other retirement savings. She wants to make a substantial single contribution before the end of the 2018/19 tax year. Amy wants to know how much she can contribute without triggering an annual allowance charge. She hasn’t triggered the Money Purchase Annual Allowance and the tapered reduction of annual allowance for people with high income doesn’t apply.

CARRY FORWARD

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EXAMPLE 2 - AMY

CARRY FORWARD

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EXAMPLE 3 - BRIAN

About Brian Brian is a partner in an accountancy firm and will earn £110,000 in the 2018/19 tax year. He’s been making occasional single contributions into a personal pension plan since 1 June 2009. He’s never been a member of any other pension scheme and now wants to make a substantial single contribution before the end of the 2018/19 tax year. Brian wants to know how much he can contribute without triggering an annual allowance charge. He hasn’t triggered the Money Purchase Annual Allowance and the tapered reduction of annual allowance for people with high income doesn’t apply.

CARRY FORWARD

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EXAMPLE 3 - BRIAN

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CARRY FORWARD WHAT IS AVAILABLE TO HELP?

This measure restricts pension tax relief

by Not

• Carry forward is a big part of the tax

year end campaign

• Information on technical central

• The examples we have just gone

through

SUMMARY

• Tax relief on member contributions operates over the tax year

• The annual allowance operates over the pension input period (now aligned with the tax year)

• A contribution can get tax relief but also attract an annual allowance charge

• The annual allowance charge is paid by the member

• Carry forward can boost the annual allowance available

IMPORTANT INFORMATION

The information in this presentation is based on our current understanding of current Legislation, Regulations Consultation and Review Documents. These may be affected by future changes.

All literature about products that carry the Royal London brand is available in large print format on request to the Marketing Department at Royal London, St Andrew House, 1 Thistle Street, Edinburgh EH2 1DG.

All of our printed products are produced on stock which is from FSC® certified forests.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, company number 05817049. Registered office is at 55 Gracechurch Street, London EC3V 0RL.

January 2019 CAT Code

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