Date posted: 30th Oct 2018
Since April 2016, the amount that a high earning taxpayer could contribute to their pension has been limited.
For those with ‘income’ of over £150,000, the annual pensions allowance of £40,000 is reduced by £1 for every £2 of earnings above £150,000.
The maximum reduction in the allowance is £30,000, which means that anyone earning above £210,000 will have an annual allowance of £10,000.
However, the term ‘income’ does not just include salary, benefits in kind, dividend income, bank interest, rental income etc it also takes into account pension contributions paid by an employer direct to the pension company. Sometimes the latter is in the form of a defined contribution scheme, which is easy enough to work out but on occasions, if the individual is in a final salary scheme, the deemed contribution to reflect the increase in the value of the final pension income, needs to be worked out by pensions specialists.
Any contributions above the annual allowance (plus an unused pensions allowances in earlier years) would be subject to tax.
We are finding that many individuals (particularly those with final salary pensions) who are subject to a restricted annual allowance are not even aware of it.
To give an example, let’s say Jane earns £135,000 but her employer also contributes £40,000 to her pension each year too, meaning that Jane has no unused allowances to bring forward from earlier years.
Jane’s total income for calculating the pensions allowance is £175,000. This means that her annual allowance is restricted by £12,500 (being 50% of the excess of income over £150,000). Her annual allowance therefore reduces from £40,000 to £27,500.
Jane therefore has an excess pension contribution of £12,500, taxable at 40% i.e. £5,000 of tax payable.
Jane could possibly ask the pension scheme to pay this tax charge on her behalf, but if the pension scheme isn’t aware of this, for a number of years, they may refuse and leave Jane to pay the tax bill personally.
Essentially the tax relief would cancel out the tax advantage Jane has received by her employer placing the funds into pension for Jane, tax free.
If you believe that you are impacted by these rules, then get in contact with us today.