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TAX RELIEF AND THE ANNUAL ALLOWANCE
LEARNING
At the end of this session you’ll have an understanding of:
• the rules on tax relief and how much is available
• the relationship between the annual allowance and tax relief
• what triggers the Money Purchase Annual Allowance
• how to calculate the annual allowance when the taper applies
• how to calculate unused annual allowance using carry forward.
OBJECTIVES
TAX RELIEF ON CONTRIBUTIONS
• Employer contributions – paid gross
• Member contributions – relief at source or net pay arrangement
MEMBER CONTRIBUTIONS
• Relevant UK individual
• Gross contributions don’t exceed the higher of £3,600 p.a. and 100% of relevant UK earnings over the tax year
CONDITIONS FOR TAX RELIEF
MEMBER CONTRIBUTIONS
• Applies to non-occupational schemes
• Basic rate tax relief added to net contribution
• Any higher rate tax relief claimed via self-assessment
RELIEF AT SOURCE
EXAMPLE TAX CALCULATION
Income band Tax
Personal allowance
£12,500 £0
Basic rate tax £37,500 £7,500
Higher rate tax £1,000 £400
Total tax £7,900
A client with taxable income of £51,000
EXAMPLE TAX CALCULATION
Income band Tax
Personal allowance
£12,500 £0
Basic rate tax £38,500 £7,700
Higher rate tax £0 £0
Total tax £7,700
After paying a £1,000 pension contribution
EXAMPLE TAX CALCULATION
Income band Tax
Personal allowance
£12,500 £0
Basic rate tax £38,500 £7,700
Higher rate tax £0 £0
Total tax £7,700
After paying a £3,000 pension contribution
MEMBER CONTRIBUTIONS
• Only available to occupational schemes
• Gives tax relief at the member’s marginal rate immediately
NET PAY ARRANGEMENT
ANNUAL
• £40,000 for those with taxable income of no more than £150,000
• Measured over the pension input period (PIP)
• Can carry forward unused annual allowance
ALLOWANCE
MONEY PURCHASE
• Is currently £4,000
• Applies to money purchase (DC schemes) only
• Is triggered by certain events
• Carry forward is unavailable
ANNUAL ALLOWANCE (MPAA)
MPAA
• Taking income from a capped drawdown plan that exceeds the GAD limit
• Receiving a lump sum from uncrystallised funds (UFPLS)
• Taking income payments from a flexi-access drawdown plan
THE TRIGGERS
WHAT WON’T
• Receiving PCLS only
• Taking a ‘small pot’ lump sum
• Trivial commutation
• Taking income from a capped drawdown plan that’s within the GAD limit
• Additional fund designation to an existing capped drawdown plan
• Buying a lifetime annuity
TRIGGER MPAA
MPAA
• John has triggered the MPAA
• He pays contributions to DC schemes of £3,000.
• And has £37,000 AA left meaning an additional £1,000 could be paid to DC schemes.
• If John paid contributions of £6,000 to DC schemes, an AA charge on the £2,000 excess would apply and there would be £36,000 of AA available for DB schemes. HAS T
VERSUS AA
THE PENSION
• From 8 July 2015 all PIPs have been aligned with the tax year
• Earlier PIPs may not be aligned with the tax year
INPUT PERIOD
SUMMER
• Ensured that all PIPs aligned with the tax year, with effect from 8 July 2015
• Introduced transitional arrangements to ensure the change didn’t disadvantage anyone
• Provided for a reduced annual allowance for those with taxable income of over £150,000 from 6 April 2016
BUDGET 2015
THE PENSION
• Contributions (DC schemes)
• Value of pension accrued (DB schemes)
INPUT AMOUNT
DEFINED
• Calculate the value of the pension accrued at the beginning of the tax year
• Adjust for inflation
• Calculate the value of the pension accrued the end of the tax year
• Deduct the adjusted opening value from the closing value
BENEFITS
TAPERING OF
• Effective from 6 April 2016
• Reduces annual allowance by £1 for every £2 by which adjusted income exceeds £150K
• Can’t reduce AA below £10K
• £10K annual allowance would apply where ‘adjusted income’ is £210K or more
• Taper doesn’t apply where ‘threshold income’ doesn’t exceed £110K
ANNUAL ALLOWANCE
WHAT’S INCLUDED IN
• Salary
• Commission
• Bonuses
• Overtime
• Shift allowances
• Dividends
• Rental income
• Any other income subject to income tax
TAXABLE INCOME
DEFINITION OF
• Individual’s taxable income, less
• any lump sum death benefits received which are taxed because the member died at age 75 or more, plus
• any employment income given up for an employer contribution through a salary exchange agreement entered into on or after 9 July 2015, less
• the gross amount of any relief at source and net pay pension contributions paid
Threshold income limit is £110,000
THRESHOLD INCOME
DEFINITION OF
• individual's taxable income, plus
• the value of any employer contributions for the tax year but less
• any lump sum death benefits received which are subject to tax because the deceased died at age 75 or more.
If the final amount exceeds £150K, annual allowance reduced by £1 for each £2 excess
ADJUSTED INCOME
THE TAPERED ANNUAL ALLOWANCE
*For DB schemes this will be the pension input amount less employee contributions
EXAMPLE
• Mike earns £160,000 p.a.
• has investment income of £10,000 p.a.
• pays £8,000 p.a. pension contribution to his occupational scheme (net pay arrangement)
• employer pays another £8,000
What’s his annual allowance?
MIKE’S
• £160,000 (earnings), plus
• £10,000 (investment income), less
• £8,000 (employee contributions)
= £162,000
Payment of a further gross pension contribution of £52,000 (£41,600 net) would reduce his threshold income to £110,000
THRESHOLD INCOME
MIKE’S
Adjusted income:
• £160,000 (earnings), plus
• £10,000 (investment income), plus
• £8,000 (employer contribution)
= £178,000
Annual allowance:
£40,000 less
(£178,000 - £150,000) divided by 2
= £26,000
ADJUSTED INCOME
THE ANNUAL
• Paid by the member
• Identified via the tax return
• Effectively removes tax relief
• Can be paid via the scheme
ALLOWANCE CHARGE
ANNUAL ALLOWANCE SCHEME PAYS - MANDATORY
Cross-scheme tax charge greater than £2,000
PIA under scheme > standard AA (currently £40k)
AND
ANNUAL ALLOWANCE
5/4
• Relevant tax year • End of relevant tax year
6/7
• Tax Year 1 • Deadline for employers/3rd parties to provide information
6/10 • Tax Year 1 • Deadline for schemes to provide PSS where applicable
31/1 • Tax Year 1 • Self-assessment deadline (online)
31/7 • Tax Year 2 • Deadline for submission of scheme pays notice
31/7 • Tax Year 4 • Deadline for submission of amended scheme pays notice
MANDATORY SCHEME PAYS TIMELINE
ANNUAL ALLOWANCE
Feature
“Adjustment must be just and reasonable”
Tax relief
LTA Utilisation
Actuarial Adjustments (DB)
30
SCHEME PAYS ADVANTAGES
CARRY FORWARD
FIONA HANRAHAN JANUARY 2020
32
CARRY FORWARD LEARNINGS POINTS
By the end of this session you will:
• know where people go wrong when doing
carry forward calculations and how to
prepare
• understand carry forward by working
though some case studies
• know about the resources we have to help
and where to find them
33
CARRY FORWARD WHERE DO PEOPLE GO WRONG?
• Get mixed up between annual allowance and tax
relief
• Get the PIPs wrong
• Forget about complications of 15/16 tax year
• Forget about taper or MPAA
• Don’t handle employer contributions correctly
• Don’t handle a previous carry forward correctly
• Get confused about eligibility for carry forward
• Try and do DB calculations themselves
34
CARRY FORWARD WHAT DO YOU NEED IN ADVANCE?
• Eligibility for CF
• Current earnings (possibly earlier years too)
• Contribution history
• Earlier detail if previous CF
• Use the table
CARRY FORWARD
35
EXAMPLE 1 - SAM About Sam • Sam has his own limited liability company. In 2019/20,
he’ll pay himself a salary of £5,000 and dividends of £100,000.
• He took out a personal pension plan on 1 August 2012 and has been saving £1,200 per month in employer contributions ever since.
• He has no other retirement savings and wants to make a substantial single contribution before the end of the 2019/20 tax year.
• Sam wants to know how much he can contribute without triggering an annual allowance charge. He hasn’t triggered the Money Purchase Annual Allowance (MPAA) and the tapered reduction of annual allowance for people with high income doesn’t apply.
CARRY FORWARD
37
EXAMPLE 2 - AMY
About Amy • Amy is the Finance Director of a large manufacturing company
earning £180,000 in the 2019/20 tax year.
• Her employer has been making single contributions into a group personal pension plan for her since 1 May 2010. She hasn’t been contributing herself and doesn’t have any other retirement savings.
• She wants to make a substantial single contribution before the end of the 2019/20 tax year.
• Amy wants to know how much she can contribute without triggering an annual allowance charge. She hasn’t triggered the Money Purchase Annual Allowance and the tapered reduction of annual allowance for people with high income hasn’t applied in previous years but could this year.
CARRY FORWARD
39
EXAMPLE 3 - BRIAN
About Brian • Brian is a partner in an accountancy firm and will earn
£110,000 in the 2019/20 tax year.
• He’s been making occasional single contributions into a personal pension plan since September 2015.
• He’s never been a member of any other pension scheme and now wants to make a substantial single contribution before the end of the 2019/20 tax year. He previously used carry forward in 2016/17.
• Brian wants to know how much he can contribute without triggering an annual allowance charge. He hasn’t triggered the Money Purchase Annual Allowance and the tapered reduction of annual allowance for people with high income doesn’t apply.
41
CARRY FORWARD WHAT IS AVAILABLE TO HELP?
This measure restricts pension tax relief
by Not
• Carry forward is a big part of the tax
year end campaign
• Information on technical central
• The examples we have just gone
through
LEARNING
At the end of this session you’ll have an understanding of:
• the rules on tax relief and how much is available
• the relationship between the annual allowance and tax relief
• what triggers the Money Purchase Annual Allowance
• how to calculate the annual allowance when the taper applies
• how to calculate unused annual allowance using carry forward.
OBJECTIVES
IMPORTANT INFORMATION
The information in this presentation is based on our current understanding of current Legislation, Regulations Consultation and Review Documents. These may be affected by future changes.
All literature about products that carry the Royal London brand is available in large print format on request to the Marketing Department at Royal London, St Andrew House, 1 Thistle Street, Edinburgh EH2 1DG.
All of our printed products are produced on stock which is from FSC® certified forests.
The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Registered office is at 55 Gracechurch Street, London EC3V 0RL.
January 2020 E 4 EM 0084
THANK YOU