Budget Pensions Tax changes alter Pensions landscape for High Earners
A change to the rules on pensions tax relief announced in the Summer Budget on 8 July will have major consequences for those earning more than £150,000 pa, and will also affect some with earnings between £110,000 pa and £150,000 pa.
From tax year 2016/17 the annual allowance will be reduced for those with annual incomes over £150,000. For every £2 of income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.
Notably, the value of pension contributions is taken into account when assessing whether an individual has an annual income over £150,000, so an individual with annual earnings of less than £150,000 (subject to a minimum of £110,000) could be caught.
In connection with the annual allowance changes, the rules are being changed to align all "pension input periods" with tax years, so that, from tax year 2016/17, the value of an individual's pension benefits will be tested against the annual allowance for the tax year in which the contributions are paid.
The system will be more straightforward from 6 April 2016 onwards. But the transitional rules announced at the Summer Budget are complex, with an £80,000 annual allowance to 8 July 2015 and special rules for the period 9 July 2015 to 5 April 2016. Schemes will need to update their systems and provide additional information.
More radical change ahead?
As a separate measure, the Summer Budget announced a consultation on whether the tax treatment of pension saving should be fundamentally reformed, possibly by removing tax relief altogether at the point when pension contributions are made and replacing this with some other form of Government "top up" and tax exemptions at the point when benefits are taken.