2016 Changes in pension legislation affecting you

December 23, 2015 | posted in Industry Comment

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A major change in pension legislation could seriously affect you and result in you paying income tax of up to 45% on your pension contributions

Key date: 6th April 2016 - If you think your gross income (income from all sources not just salary) is over £110,000, you may need to change the amount you save in pensions.

Being experts in our field, we understand how important it is for you to seek professional advice, especially when it can significantly reduce your liability to tax. 


The impact of this change:

For employees with gross income (income from all sources not just salary) in excess of £150,000 your qualifying pension contributions will be tapered back by £1 for every £2 earned, up to a maximum of £30,000.

What does this mean?

If your gross income is £210,000 or more you will still be able to fund £40,000 into your pension, but will only receive tax relief on £10,000 of this contribution. Therefore the remaining £30,000 will be taxed at 45%. Clearly these are significant and complex changes which require specialist pensions advice. 

So what course of action should you take?

Your financial position is individual and personal to your own particular circumstances, so in order for you and us to access your anticipated position in readiness for these changes, we will need to take into account all of the sources of income listed below: 

•    Salary, bonuses,flex points (if applicable) taken as cash, benefits in kind & car allowances
•    Profits from self employment
•    Pension income already in payment from other schemes - 
     (including State Pension)
•    Taxable element of employee share options
•    Savings, dividends and rental income
•    Taxable element from a redundancy settlement

Please note: This is NOT a complete list.


                       
With this information, you may want to ask yourself?

Q) How do I calculate my income and how will I be able to contribute to my pension?


A) The rules are very complex and depend on your own circumstances; you may need a tax adviser to calculate this for you.  It is not possible to establish if income has exceeded the threshold purely from payslips alone. Seek professional advice BEFORE making ANY decisions. 

Q) My income fluctuates each year, what should I do?

A) Seek advice now – It is your responsibility to monitor your taxable income and pension contributions throughout the tax year.  

Q) My income is likely to exceed £210,100 in 2016/17, does this mean I can only have £10,000 paid into pensions in that year?

A) Not necessarily, you can pay in more but it will be subject to the annual allowance tax charge 45%. You may also be allowed to make contributions in respect of the preceding 3 tax years (you should take professional advice on this).

Q) My taxable income is below £150,000, does that mean I’m not affected?

A) Not necessarily, it will depend on your personal circumstances.

Q) How can I calculate my unused allowances?

A) The rules are complex and it’s best to seek professional advice first. If you exceed the thresholds a tax charge of 45% is levied on the excess. 

Q) Can I reduce contributions to pension part way through the year? 

A) Speak to your HR department.

Q) My taxable income will exceed £150,000; will my company pay a salary supplement in lieu of Employer pension contributions?

A) Speak to your HR department.

Q) If your company offers Flex Benefits - can I specify in the FB election to automatically stop contributions once the £10,000 threshold is reached? 

A) Probably not, individuals should monitor this themselves. Your company may allow individuals to change Flex Benefit elections mid-year for example where the annual allowance has been exceeded but recommend you should seek professional advice first. 

Q) Will I need to complete a tax return?

A) Yes in the vast majority of cases. 

Q) How do I pay the annual allowance charge?

A) You must tell HMRC if you are liable to the annual allowance charge by including the relevant information in your self assessment tax return. You need to complete a registration form to let HMRC know what’s changed and submit a return.   

In certain circumstances, it’s possible for the annual allowance charge to be met out of the pension scheme your contributions have been made into.The rules are complex so you should seek advice first. 

Q) If pension payments exceed my annual allowance, can I ask for a refund of contributions?

A)  Very unlikely, HMRC only allow refund of contributions in very limited, specific circumstances.  It is not possible to refund contributions purely on the basis that the annual allowance has been exceeded.

If you would like to speak with us about any of the above you can contact us on 01275 462 469 where one of our chartered financial planners will be happy to help, alternatively you can email info@citimark.co.uk