We are quite used to the phrase ‘use it or lose it’. I’ve seen local pubs, post offices, and bus routes use it to encourage more customers. As we come towards the end of the tax year (yes, it will be on top of us before you know it) there are a few ‘use it or lose it’ opportunities. Here’s one of the less obvious ones.
High earners – pension opportunities
We are about to enter the fourth tax year of having the Tapered Annual Allowance for pensions. It’s not quite a use it or lose it allowance as you can mop up (carry forward) unused allowances from the three previous tax years provided you have been a member of any pension scheme that year.
So, up to Friday 5 April 2019 we still have one year of ‘pre-tapering’ allowances to look at (the 2015/16 tax year). High earners who have been tapered for the last three years have until the end of this tax year to ‘use it or lose it’ any unused allowance from 2015/16.
What is the tapered annual allowance?
On 6 April 2016 the government introduced the Tapered Annual Allowance for individuals with “threshold income” of over £110,000 AND “adjusted income” of over £150,000. Where an individual has a “Threshold income” of £110,000 or less they cannot be subject to the tapered annual allowance and there is no requirement to calculate adjusted income. If threshold income exceeds £110,000 you must calculate adjusted income to work out the amount of any tapered annual allowance.
How to work out what allowance you have left
In 2015/16 pensions were transitioning to all be measured in line with tax years. As a result, we actually had two mini-years split with the first ending on 8 July 2015. The timing of your contributions (and something called the Pension Input Period for your scheme) was particularly important. The first mini-year had an £80,000 allowance of which up to £40,000 (if unused) could be used in the second half.
It’s what’s left over from this second half of 2015/16 that’s still available. So if you paid in £25,000 before and after 8 July 2015 you would have £15,000 of allowance left. If you paid in £50,000 before and £25,000 after you would have £5,000 left to carry forward.
What should you do?
For people earning over £210,000 it’s normally clear that your annual allowance has reduced to £10,000. However, for those in the £110,000 to £210,000 bracket it can be a lot more complicated. You should seek advice to determine what your allowance is this year and look back at the previous three to determine what carry forward you have – if any.
It’s worth watching out for two curve balls which a financial planner will already be watching out for.
- Lifetime Allowance. Some, but not all high earners will have built up lots of pension benefits. You should check whether mopping up allowances will cause you to exceed your allowance. This isn’t always a bad thing (the numbers can work), but it’s better to know the situation first!
- Money Purchase Annual Allowance. Since the introduction of Pension Freedoms on 6 April 2015 if you take income ‘flexibly’ from a pension (i.e. not just tax-free cash) then you will be subject to this allowance. You won’t be able to use carry forward and you will only be able to contribute £4,000 to defined contribution pensions (e.g. personal pensions or group personal pensions) each year.
If you do go over your allowance, and run out of carry forward, it’s not the end of the world. The excess is added to your taxable income and taxed at those rates. You can pay the tax personally (and leave the money in the pension) or most of the time you will be able to use the pension to pay it for you.