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A tapering opportunity

18 March 19

In association with Brewin Dolphin: use your pensions allowance carry forward while you can still use the former £40,000 limit, now reduced to £10,000

by Kirsty Thomson

Although the pensions landscape has not changed too drastically since the introduction of “pensions freedoms” in April 2015, many individuals are still coming to terms with what the changes mean in practice. It is perhaps unsurprising, therefore, that most savers also remain in the dark about the extremely complex annual allowance taper, introduced just one year later, albeit with much less fanfare. The tapering rules specifically target those with high levels of income, who will potentially see their pensions annual allowance reduced from £40,000 to just £10,000. 

When applying the taper, income from any source is taken into account, not just earnings. The rules first require an assessment of “threshold income” – which must be less than £110,000 if the taper is to be avoided – followed by the individual’s adjusted income, which takes employer pension contributions into account. If adjusted income passes the £150,000 threshold, the annual allowance is reduced by £1 for every £2 of excess, down to a minimum of £10,000. Pension contributions in excess of an individual’s annual allowance could result in a punitive tax charge. 

Perhaps one of the reasons why the taper has not been more widely appreciated is the fact that individuals have been able to carry forward unused annual allowance from the previous three tax years, to offset against contributions in the current year. Accordingly, many of those caught by the tapering rules have managed to avoid a tax charge so far.   

However, it is worth noting that the 2018-19 tax year will be the last chance for those individuals to take advantage of this more significant carry forward, as the window of opportunity to rely on the £40,000 annual allowance from the 2015-16 tax year closes, and the full effect of the taper is felt. If you think you may be impacted by the annual allowance taper, action should be taken now to utilise any allowance remaining from previous years, and to ensure that an unexpected tax charge is not triggered during 2019-20.   

Kirsty Thomson, Dip PFS, LLB (Hons), Dip LP

The value of investments can fall and you may get back less than you invested. The opinions expressed are not necessarily the views held throughout Brewin Dolphin Ltd. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability you should contact us. Please note that this article was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances, therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

 

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