ADVISER
FACTSHEET
Tech Talk
August 2015
Aligning pension input periods
and the tapered annual allowance
Pension input periods are an important part of the annual allowance.
Changes to the annual allowance were announced in the recent Budget,
in particular the tapering of the annual allowance from 6 April 2016 for
individuals with high incomes. In advance of this, transitional rules are
being introduced to align pension input periods with the tax year from
6 April 2016 and to protect individuals from an annual allowance charge
on pre 9 July 2015 pension savings.
In addition to giving a brief overview of the transitional rules, this Tech
Talk outlines how the tapering of the annual allowance will work from
6 April 2016. What follows is based on published draft guidance and
therefore may be subject to change.
Contents
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For professional advisers only
Pension input periods from 6 April 2016
Transitional PIP rules for 2015/16
Annual allowance 2015/16
Money purchase annual allowance 2015/16
C
alculating pension input amounts
for 2015/16
Carry forward of unused annual allowance
The tapered annual allowance
I
nteraction between the MPAA and the
tapered annual allowance
Comment
Pension input periods from 6 April 2016
For the 2016/17 tax year, all existing arrangements
will have a 12 month pension input period (PIP)
aligned to the tax year. All subsequent PIPs will
be aligned with the tax year. Varying a PIP will no
longer be possible.
Transitional PIP rules for 2015/16
All PIPs open on 8 July 2015 end on that date, with
the next PIP running from 9 July 2015 to
5 April 2016. The 2015/16 tax year is split into two
for the purpose of the annual allowance. The period
from 6 April 2015 up to and including 8 July 2015
is referred to as the pre-alignment tax year and the
period from 9 July 2015 up to and including 5 April
2016 is referred to as the post-alignment tax year.
What this means is that under an existing
arrangement, an individual will have either two
or three PIPs ending in the 2015/16 tax year.
EXAMPLE 1
PIP running from 1 September to 31 August – from 1 September 2014 the PIPs run as follows:
1 September 2014 to 8 July 2015
9 July 2015 to 5 April 2016
6 April 2016 to 5 April 2017 (2016/17 tax year)
In this scenario two PIPs end in the 2015/16 tax year.
PIP running from 1 June to 31 May – from 1 June 2014 the PIPs run as follows:
1 June 2014 to 31 May 2015
1 June 2015 to 8 July 2015
9 July 2015 to 5 April 2016
6 April 2016 to 5 April 2017 (2016/17 tax year)
In this scenario three PIPs end in the 2015/16 tax year. Note that the PIP that started on 1 June 2015, which
was due to end in the 2016/17 tax year, ends in the 2015/16 tax year as a result of the changes.
Annual allowance 2015/16
The annual allowance for the pre-alignment tax
year is £80,000 and for the post-alignment tax
year it is nil. Any unused annual allowance from
the pre-alignment tax year is carried forward to
the post-alignment tax year subject to a maximum
of £40,000. Unused annual allowance from the
three tax years prior to 2015/16 can still be taken
into consideration. However, any unused annual
allowance from these years is used to offset
any excess i.e. pension input amount greater
than £80,000 in the pre-alignment tax year
first with any remainder being available for the
post-alignment tax year. This is illustrated in the
following examples.
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EXAMPLE 2
Julie has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling £50,000.
Her pension input amount in respect of the pre-alignment tax year is £30,000. For Julie to avoid an annual
allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for the
post-alignment tax year?
The answer is £90,000. This is broken down as follows:
Unused annual allowance from the pre-alignment tax year is £50,000 (£80,000 - £30,000), meaning that
Julie is able to carry forward the maximum of £40,000 to the post-alignment tax year. None of the unused
annual allowance from the three tax years immediately prior to 2015/16 has been used in the pre-alignment
tax year, meaning that an additional £50,000 is available for the post-alignment tax year, giving a total of
£90,000 (£40,000 + £50,000).
EXAMPLE 3
Pedro has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling £50,000.
His pension input amount in respect of the pre-alignment tax year is £70,000. For Pedro to avoid an annual
allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for the
post-alignment tax year?
The answer is £60,000. This is broken down as follows:
Unused annual allowance from the pre-alignment tax year is £10,000 (£80,000 - £70,000), meaning that
Pedro is able to carry forward £10,000 to the post-alignment tax year. None of the unused annual
allowance from the three tax years immediately prior to 2015/16 has been used in the pre-alignment tax
year, meaning that an additional £50,000 is available for the post-alignment tax year, giving a total of
£60,000 (£10,000 + £50,000).
EXAMPLE 4
Tracyann has unused annual allowance from the 2012/13, 2013/14 and 2014/15 tax years totalling £50,000.
Her pension input amount in respect of the pre-alignment tax year is £90,000. For Tracyann to avoid an
annual allowance charge in respect of the 2015/16 tax year, what is the maximum pension input amount for
the post-alignment tax year?
The answer is £40,000. This is broken down as follows:
Unused annual allowance from the pre-alignment tax year is nil, as the pension input amount exceeded
£80,000. Also, £10,000 of the unused annual allowance from the three tax years immediately prior to
2015/16 has been used in the pre-alignment tax year, meaning that £40,000 remains and is available for
the post-alignment tax year giving a total of £40,000 (£0 + £40,000).
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For the individuals in Examples 2 to 4, pension
input amounts generated in the 2016/17 tax year
will be tested against their annual allowance
for that year. Carry forward of unused annual
allowance will still be an option beyond 5 April 2016
(see below).
• In the first scenario the pension input amount
Note that for other money purchase arrangements
the total pension input amount for the prealignment tax year is the sum of the pension input
amounts for all PIPs ending in the pre-alignment
tax year. Looking again at Example 1 above:
The pension input amount for the post alignment
tax year is measured over the period 9 July 2015 to
5 April 2016.
from the PIP 1 September 2014 to 8 July 2015
• In the second scenario the sum of the pension
input amounts from the PIPs 1 June 2014 to
31 May 2015 and 1 June 2015 to 8 July 2015
For defined benefit and cash balance arrangements
a different approach is used (see below).
Money purchase annual allowance 2015/16
Under existing legislation, where the money
purchase annual allowance (MPAA), currently
£10,000, applies and is exceeded, the alternative
annual allowance needs to be considered. Pension
input amounts from defined benefit arrangements
and any pension input amounts from money
purchase arrangements not tested against the
MPAA are taken into account when testing
against the alternative annual allowance, currently
£30,000. Unused annual allowance from the three
previous tax years can be used to increase the
alternative annual allowance.
If the MPAA has been triggered in the prealignment tax year, the MPAA for pre-alignment
tax year is £20,000 and the alternative annual
allowance for this period is £60,000. The MPAA
for the post-alignment tax year is nil. However,
any unused MPAA from the pre-alignment tax
year, subject to a maximum of £10,000, is carried
forward to the post-alignment tax year. The
alternative annual allowance for the post-alignment
tax year is also nil, but again any unused annual
allowance from the pre-alignment tax year and
any unused annual allowance from the three tax
years immediately prior to 2015/16 can be carried
forward. Where the money purchase pension
input amount tested against the MPAA in the
pre-alignment tax year did not exceed £10,000,
then up to £40,000 can be carried forward from
the pre-alignment tax year. Alternatively, if the
money purchase pension input amount tested
against the MPAA in the pre-alignment tax year did
exceed £10,000, then the maximum that can be
carried forward from the pre-alignment tax year is
limited to £30,000.
Where the MPAA is triggered in the post alignment
tax year, the MPAA is £10,000 for the post
alignment tax year and the alternative annual
allowance will be up to £30,000.
Further consideration of the impact of the
alignment of pension input periods on the MPAA
in the 2015/16 tax year, including examples, will be
undertaken in a separate Tech Talk.
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Calculating pension input amounts for 2015/16
For other money purchase arrangements, the
calculation of pension input amounts for all PIPs
ending in the 2015/16 tax year is done in exactly
the same way as per current legislation, but taking
account of the PIP changes.
For defined benefit and cash balance
arrangements, the calculation of the pension
input amounts for the pre and post alignment
tax years follows special rules and will be covered
in a separate Tech Talk.
Carry forward of unused annual allowance
As illustrated in Example 4 above, any unused
annual allowance being carried forward to 2015/16
from the three tax years immediately prior to it is
applied to the pre-alignment tax year first with any
remainder being available for the post-alignment
tax year. When dealing with carry forward to the
post-alignment tax year, it is the unused annual
allowance from the pre-alignment tax year (if
any) that is used first before any remaining
unused annual allowance from the three tax years
immediately prior to 2015/16.
Carrying forward unused annual allowance to the
three tax years after 2015/16 works in the normal
way. However, the way unused annual allowance for
the 2015/16 tax year is calculated is affected by the
changes. It will never be more than £40,000. The
exact amount available will be the amount available
for carry forward from the pre-alignment tax year
to the post-alignment tax year less the amount of
the pension input amount for the post-alignment
tax year.
EXAMPLE 5
Matt’s pension input amount for the pre-alignment tax year is £50,000. Therefore, the amount of unused
annual allowance available for carry forward to the post-alignment tax year is £30,000 (£80,000 - £50,000).
If Matt’s pension input amount for the post-alignment tax year is £20,000, this would mean that £10,000 of
unused annual allowance would be available in respect of 2015/16 for carry forward to future tax years.
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The tapered annual allowance
From 6 April 2016, individuals with adjusted income
in excess of £150,000 in a tax year will have their
annual allowance in that tax year reduced. For
every £2 of income they have over £150,000, their
annual allowance is reduced by £1. The maximum
reduction to the annual allowance will be £30,000,
so that individuals with adjusted income of or
above £210,000 will have an annual allowance
of £10,000.
Where an individual has threshold income of
£110,000 or less, the tapering of the annual
allowance will not apply regardless of the level of
their adjusted income.
The income definitions are as follows:
Adjusted income
• the individual’s net income for the tax year as
calculated under steps 1 and 2 of section 23 of
the Income Tax Act 2007, plus
• the amount of any relief under section 193(4)
of Finance Act 2004 (a claim for excess relief
under net pay) and section 194(1) of Finance
Act 2004 (relief on making a claim) deducted
at step 2, plus
• the amount of any pension contributions
made from any employment income of the
individual for the tax year under net pay, under
section 193(2) of Finance Act 2004, (to ensure
fairness between those who have contributions
deducted via net pay and those through relief
at source), plus
• the value of any employer contributions for the
tax year, but less
• the amount of any lump sum death benefits
that accrue to the individual in the tax year
mentioned in section 636A(4ZA)
The value of employer contributions in respect of
an arrangement for a tax year will be the pension
input amount for the arrangement for the tax year
less the total of any contributions made by or on
behalf of the individual.
Threshold income
• the individual’s net income for the tax year as
calculated under steps 1 and 2 of section 23 of
the Income Tax Act 2007, less
• the gross amount of any pension contributions
made through relief at source, less
• the amount of any lump sum death benefits
accruing to the individual in the tax year
mentioned in section 636A(4ZA), plus
• the amount of any employment income given
up for pension provision as a result of any salary
sacrifice made on or after 9 July 2015
The carry forward of unused annual allowance from
the three previous tax years will still be available.
However, where in a tax year the tapered annual
allowance applies, the amount available for carry
forward to future tax years will be the balance of
the tapered amount.
• where non domiciled individuals make
contributions to overseas pension schemes, any
relief claimed under Chapter 2 of Part 5 of the
Income Tax (Earnings and Pensions) Act 2003
for the tax year, plus
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EXAMPLE 6
Natalie’s adjusted income for the 2016/17 tax year is £180,000 and her threshold income exceeds £110,000.
Therefore, she is subject to a reduced annual allowance in that year of £25,000. Her total pension input
amount for the tax year is £20,000, meaning that she has £5,000 of unused annual allowance from the
2016/17 tax year available for carry forward to future tax years.
Interaction between the MPAA and the tapered annual allowance
Where an individual in a tax year is subject to the
taper and the MPAA, the MPAA rules apply, but
with references to the annual allowance replaced
with the tapered annual allowance.
What this means is that in a tax year where the
MPAA applies and if the MPAA is not exceeded,
then the annual allowance test for the tax year is
carried out in the normal way using the tapered
annual allowance rather than the annual allowance.
However, if the MPAA is exceeded in a tax year in
which it applies, then the taper is applied to the
alternative annual allowance (currently £30,000).
Therefore, for such individuals with adjusted
incomes of £210,000 or more, they will have an
alternative annual allowance of nil although any
available carry forward from the three previous
tax years can be added to this. Defined benefit
pension input amounts, and any money purchase
pension input amounts not tested against the
MPAA in the tax year, are tested against the
alternative annual allowance.
More on this, including examples, will follow in a
future Tech Talk.
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Comment
Beyond April 2016 the alignment of the pension
input period with the tax year does remove an
element of complexity in pension tax legislation,
which is welcome, although this is offset somewhat
by the loss of the ability to manipulate pension
input periods in order to maximise pension funding
in a tax year.
When the MPAA is factored in, the complexity
involved increases considerably and for this
reason, a separate bulletin will deal with the issues
specific to the MPAA. The calculation of pension
input amounts for defined benefit and cash
balance arrangements will also be covered in a
separate bulletin.
In addition, the alignment will give some individuals
greater scope to make more tax efficient pension
savings in the 2015/16 tax year. Individuals that will
likely be caught by the tapered annual allowance
may find this useful. However, the 2015/16
transitional rules are likely to give many advisers
a headache as they get their heads around the
rules in order to work out if opportunities exist for
their clients.
Further information
John Dunn
Pension Specialist
Technical Support Unit
Please contact the Technical Support
Unit with any further queries on:
0845 600 8651
Pension Technical Support:
[email protected]
Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance
with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay
Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained
before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject
to change. The tax treatment depends on the individual circumstances of each client.
James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS)
(registered in England number 2601833); James Hay Administration Company Limited (JHAC) (registered in England number 4068398); James Hay Pension Trustees
Limited (JHPT) (registered in England number 1435887); James Hay Wrap Managers Limited (JHWM) (registered in England number 4773695); James Hay Wrap
Nominee Company Limited (JHWNC) (registered in England number 7259308); PAL Trustees Limited (PAL) (registered in England number 1666419); Santhouse
Pensioneer Trustee Company Limited (SPTCL) (registered in England number 1670940); Sarum Trustees Limited (SarumTL) (registered in England number 1003681);
Sealgrove Trustees Limited (STL) (registered in England number 1444964); The IPS Partnership Plc (IPS Plc) (registered in England number 1458445); Union Pension
Trustees Limited (UPT) (registered in England number 2634371) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number 1739546). JHIC
has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered
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