During the summer budget Osborne quietly made changes to pension input periods.
“In advance of the introduction of the tapered annual allowance for higher earners, transitional rules have been introduced from Budget Day to align pension input periods with the tax year by April 2016 and to protect any savings already made before the budget from retrospective tax changes”
All Pension Input Periods open on 8th July will end on the 8th July with a new pension input period started running to April 5th 2016.
There has been a little quirk in doing this:
The 2015-16 tax year will be split into two mini tax years for the purpose of the annual allowance.
The Pre-Alignment tax year – 6th April 2015 to 8th July 2015:
– Individuals have a £80,000 annual allowance (plus any carry forward)
The post Alignment tax year – 9th July 2015 – 5th April 2016
– Savings from the 9th July will have a nil annual allowance, but £40,000 of the £80,000 unused annual allowance from the pre alignment tax year is added to this, assuming you were a member of a registered pension scheme during the pre-alignment tax year and they have not triggered MPAA (there are other rules for this).
Basically it looks like the government have made the 2015/16 tax year annual allowance £80,000 and in practise, this works as follows:
Client A is making the maximum annual contribution of £40,000 in monthly amounts of £3,333 per month, and from 6th April 2015 to 8th July 2015 they paid three contributions totalling £9,999.99.
The first three months contributions were in the Pre Alignment Tax year, where they were able to contribute £80,000 and the £9,999 already contributed is within this amount. During the post alignment tax year, Client A can carry over £40,000 of any unused allowance from the period April – July – effectively giving them a new annual allowance, so at the end of the year, the client will have been able to contribute £49,999.99 – either via a single top up contribution or an increase to the regular amounts.
Another example could be:
Following the start of the new tax year, Client B made a £40,000 annual contribution into their pension. From the 9th July, the client can contribute a further £40,000 of the unused pre alignment allowance, meaning that Client B will be able to contribute £40,000 more than they expected.
The change in rules is positive for those actively contributing to their pension pots and opens up the availability of a further £40,000 of funding into pensions for the 2015/16 tax year.
If you feel you can benefit from a conversation on funding your pension please do not hesitate to contact us.