Tax year-end planning – making the most of pension allowances

Changes to tax relief?

• Higher- and additional-rate taxpayers should consider maximising pension contributions. The pension tax relief framework is under review (we anticipate more information following the March budget) and tax relief could reduce.
• Consider using carry forward to fund larger contributions as tax relief will be given at the highest marginal rates.

Annual allowance reduction

• The standard £40,000 annual allowance will be reduced by £1 for every £2 of income clients have over £150,000 in each tax year, until their allowance drops to £10,000.
• For some, 2015/16 may be the last opportunity to pay in the full £40,000.
• Those affected should consider maximum funding now.

The £1 million lifetime allowance

• Fixed protection can give a lifetime allowance of £1-1.25 million, but anyone using it will need to cease pension contributions after 5 April 2016.
• This leaves roughly 7 weeks to make pension contributions and build a larger fund to protect.
• You need a fund of £1 million or more at 5 April 2016 to apply for fixed protection 2016. You may need to make pension contributions before the new tax year to make sure your pension savings are pushed over this limit.

Additional annual allowance for 2015/16

• Transitional rules have effectively split 2015/16 into two mini tax years either side of the summer Budget (8 July).
• As a consequence, an increased allowance of up to £80,000 may be available.

Fund now before accessing your pension

• Once pension income has been accessed under the new rules, the annual allowance for money purchase schemes will reduce from £40,000 to £10,000.
• Importantly, unused carry forward allowances will be lost forever.
• However, anyone who was in capped drawdown before April 2015 and has only taken their tax-free cash will retain the £40,000 annual allowance.

Dividend changes for business owners

• Next tax year, changes to dividend taxation mean many directors may face a higher Income Tax bill.
• A pension contribution could be made to reduce the overall tax bill whilst still attaining the same remuneration.
• Employer pension contributions receive the same National Insurance savings as dividends but, more importantly, are not taxable on the director.
• Currently directors pay no additional tax on dividends less than the higher rate threshold. From April, all dividend income greater than any unused personal allowance and the new £5,000 allowance will be taxable.

Reinstate your personal allowance

• A higher-rate taxpayer with taxable income of more than £100,000 will lose £1 of personal allowance for every £2 of income above this – up to the £121,200 mark where no personal allowance remains.
• A personal pension contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%.
• For higher levels of income, or larger contributions, the effective rate will be between 40% and 60%.

Bonus sacrifice

• Sacrificing a bonus for an employer pension contribution would result in an employer and employee National Insurance saving, which could be added to the contribution.
• As taxable income would also reduce, this may result in those affected potentially recovering their personal allowance.

The online web resource is a key aspect of our partnership with the Law Society of Scotland. This has been designed to provide relevant information to support solicitors when discussing their clients’ finances. Download factsheets ranging from Key Facts about Pension Reform and Pension Reform on Divorce to the latest Market and Economic Commentary.