22nd March 2016

Income over £100,000? Your ability to contribute to pension arrangements may reduce from 6 April

From 6 April 2016, the maximum annual tax-relievable pension contribution will reduce for those with ‘income’ (see below for definition) of over £150,000.

The standard £40,000 allowance will reduce by £1 for every £2 over the £150,000 to a minimum allowance of £10,000 for those with incomes of £210,000 or more.

Definition of income

So what is the definition of income here? HMRC have used the term ‘adjusted income’ and it broadly consists of two elements:

1. The individual’s income from all sources before tax and before deducting pension contributions.

plus

2. The value of any employer contributions.

In other words, your income could well be below £150,000, but you would still be caught under this test.

The get out clause?

Some individuals who have income of over £150,000 may be able to escape the reduced allowance, or at least defer it for a year or two, if they make a large pension contribution.

This is the case where ‘threshold income’ (another new term) is less than £110,000 in the tax year.

Threshold income is broadly as follows:

1. The individual’s income from all sources before tax and before deducting pension contributions.

less

2. The value of personal (non-employer) contributions. Remember that the ability to bring unused pension capacity forward from previous years remains.

Conclusion

For those with higher incomes, your capacity to make pension contributions will reduce from 6 April, unless you are in a position to make a large pension contribution using relief from previous tax years.

The Budget on 16 March made no major changes to the pension rules, but the reduced Annual Allowance, announced in a previous Budget, takes effect on 6 April and it will become more difficult for those with high incomes to build large (and, due to the changes over the last year, very attractive) pension pots. Those affected may wish to consider other savings arrangements and look at other ways to pass funds to the next generations.

Richard is a Chartered financial planner, Certified financial planner, Fellow of the Personal Finance Society, Fellow of the Institute of Financial Planning, and Affiliate of the Society of Trust and Estate Planning. He works with clients in Scotland and in London and has particular expertise in helping individuals and families pass wealth down the generations. View Richard’s profile here.

If you would like to discuss your financial planning options, please contact us with any questions you might have. You can do this by calling our head office on 0131 220 0000, or by emailing us at enquiries@carbonfinancial.co.uk. or you can also follow us on FacebookTwitter or LinkedIn.

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