My client is concerned about the proposals in the recent Summer Budget 2015 in connection with the various pension measures that were announced. Can you briefly explain these proposals?
A: The recent Summer budget and Finance Bill 2015 made three main announcements to the treatment of pensions for individuals.
Schedule 4 of the Bill introduced plans to reduce and restrict the annual allowance for pension contributions for ‘high income individuals’. For this purpose, a high income individual is someone who has ‘adjusted income’ in excess of £150,000 per annum. This is the individuals’ net income for income tax purposes, plus any pension inputs, less certain excluded receipts.
To provide clarity for individuals with lower salaries who may have one off spikes in employer contributions, a net income threshold of £110,000 will apply. If the individuals’ net income is no more than £110,000 they will not normally be subject to the tapered annual allowance. Anti-avoidance provisions will apply so that any salary sacrifice arrangements set up on or after 9 July 2015 will be included in the threshold definition.
From 6 April 2016, high-income individuals will have their pension annual allowance for the tax year reduced by £1 for every £2 of adjusted income above the £150,000 level. Once adjusted income reaches £210,000 the annual allowance will be reduced to a minimum level of £10,000 (down from £40,000).
Pension Input Periods
In order to support the above changes, Schedule 4 of the Bill also introduces rules to align pension input periods to the tax year. Transitional rules will apply for 2015/16. The transitional rules will ensure that nobody is worse off in 2015/16 than they would have been in an earlier year. In certain circumstances, individuals could actually benefit from an increased annual allowance for the current tax year.
Previous pension input periods which are already open on 8 July 2015 will end on that date A second period will begin on 9 July 2015 and run to 5 April 2016 and all subsequent periods will be for the tax year commencing 6 April 2016 ending on 5 April 2017.
The 2015/16 year will be treated as consisting of two years for annual allowance purposes; the pre-alignment (6 April to 8 July 2015) and the post-alignment (9 July to 5 April 2016) tax years. For the pre-alignment tax year, the cap on contributions is £80,000. For the period starting on 9 July, the annual allowance is the unused part of the £80,000 from the first period capped at a maximum of £40,000.
For simplicity, defined benefit and cash balance schemes during this period there will be a time apportionment of the increase in pension rights across the combined input periods. For defined contribution schemes, the pension input amounts will continue to be the total of any payments made in each input period.
Lump Sum Death Benefits
Provisions were also included in the Bill to remove the 45% tax charge on prescribed lump sum death benefits paid from a registered pension scheme directly to an individual beneficiary.
New provisions apply where payments to qualifying beneficiaries are made in situations where the pension holder dies over the age of 75 or where the pension holder died under the age of 75 but the scheme administrator did not pay the lump sum within two years of being aware of the death. In those situations tax will be payable at the recipients marginal rate of tax instead.
The change has an effect for lump sum benefits paid on or after 6 April 2016. If the pension holder dies under the age of 75, then except in the situation above, lump sum benefits will be exempt from tax.
Lump sum death benefits withdrawals taxed in this way include those taken when a recipient has been ‘temporarily’ resident outside the UK but returns within five years of becoming non-resident. Legislation has also been introduced to confirm that lump sum benefits of this nature taken from foreign pension schemes are also outside the scope of PAYE.
For further information on how TaxWise can help your business please call: 0844 892 2473