Insight
7 January 2016
Don’t ignore the looming cuts to
pension tax relief for high earners
In just three months’ time the Government will
slash the tax relief that high earners currently
benefit from on pension contributions.
Anyone on a salary of £110,000 or more could
be hit by April’s tax raid. If you are affected you
could lose tens of thousands of pounds – even
hundreds of thousands of pounds over
a lifetime.
That is the bad news. The good news is that
until April there is a window of opportunity. As
things stand the tax relief on offer to higher
earners is very generous. It is time to take
advantage of today’s attractive reliefs while
you still can.
At Brewin Dolphin, we know that this is an issue of enormous importance for many of our clients.
Our financial planners are on hand to make sure you do not lose out. Don’t delay. Making arrangements to boost
your pension contributions can take time, especially if your employer is involved. If you miss this chance you could
regret it.
You should remember that the value of investments can fall and you may get back less than you invested.
Will I lose out?
Those earning £150,000 and above are most likely to be affected, though everyone earning £110,000 or more
should seek expert advice due to the way the tax grab works.
The annual allowance of £40,000 will be tapered to £10,000 on contributions made by those earning more than
£150,000. The result being that the amount of tax relief available on pension contributions will be restricted.
However, it potentially has consequences for anyone on a salary of £110,000 or more because the calculation
of earnings will include pension contributions and bonuses. If you have a salary of £110,000, receive a £10,000
bonus and contribute £40,000 to your pension you will be caught by the measure.
What is the situation now?
All pension contributions made from earnings qualify for tax relief at your highest income tax rate – up to an annual
limit. The cap on contributions that qualify for tax relief in one tax year, known as the annual allowance, is £40,000.
This encompasses contributions to defined contributions plans, employer pension contributions and benefits built up
in final salary schemes.
How will it work in future?
From April 2016 the annual allowance will be reduced on income between £150,000 and £210,000 to a minimum of
£10,000. The £40,000 allowance will go down by £1 for every £2 of income above £150,000.
This would mean, for example, that a person earning £190,000 would have a £20,000 annual allowance while
someone earning £210,000 and over would have a £10,000 annual allowance. The immediate cost to someone
earning £210,000 will be £13,500 in lost tax relief.
How high earners will see their pension tax relief restricted
Earnings
Annual contribution allowance
Amount of tax relief available
(up to 45%)
£150,000 or below
£40,000
£18,000
£170,000
£30,000
£13,500
£190,000
£20,000
£9,000
£210,000 or more
£10,000
£4,500
What can I do?
You should ensure you know what pension arrangements you have and what contributions you can make. This
could be a substantial amount as it is possible to ‘carry forward’ any unused annual allowance from the previous
three years. Last year, the maximum annual contribution was £40,000, while in 2013-14 and 2012-13 it was
£50,000. This means you may be able to pay in as much as £140,000 extra.
However, if you already have a substantial pension pot you must take care. The lifetime allowance, the maximum
amount the government allows you to hold in your pension pot over your entire lifetime, will be reduced to £1 million
from £1.25 million in April. Savers who amass a pot that exceeds this limit and do not take preventative action could
be forced to pay 55% tax on the surplus.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you
should contact us.
Can I make use of my bonus?
Many people will find out what their bonus will be in the next few months and this can be put to work in your
pension. Asking your employer to pay this into your pension before you receive it via a bonus sacrifice scheme can
be very tax efficient. Then it will be treated as an employer contribution by HM Revenue & Customs and you would
not pay any tax on it. Your employer benefits from reduced National Insurance contributions, too. It may agree to pay
part or all of the National Insurance saving into your pension, though it is under no obligation to do so.
To benefit from this arrangement the key thing is that you need to give up your bonus before it is paid to you. That
means if your bonus is due soon you need to act fast.
What are my options when I have used my allowance?
You might want to channel extra money into an alternative savings scheme such as an individual savings account
(ISA) if you have not used your ISA limit. Like pensions, ISAs are tax-efficient savings vehicles. With ISAs though,
contributions come out of taxed earnings but you are not taxed on any gains. This tax year you can put £15,240 into
an ISA.
If you are prepared to take more risk another option is a venture capital trust or VCT. You can put up to £200,000 a
year into these funds that will invest your money in small unquoted companies. You receive upfront income tax relief
on your investment and there is no tax on dividends and no capital gains tax to pay. The availability of tax reliefs also
depends on the companies the VCT invests in maintaining their VCT qualifying status. HM Revenue & Customs
may change the rules on VCT tax relief in the future. VCT shares could fall or rise in value more than the shares of
companies listed on the main market of the London Stock Exchange. They may also be harder to sell. Investors
should always consider a VCT as a long-term investment.
Enterprise Investment Schemes, or EISs for short, are another way of investing in small unquoted companies. You
can invest up to £1 million a year with upfront income tax relief of 30%. There is no capital gains tax on the sale
of your holding provided you have held if for a minimum of three years and if capital gains on another asset are
realised, tax can be deferred if the gains are reinvested in an EIS. EIS products are high risk, and you should seek
professional financial advice before making any investment decision. Smaller companies have a higher failure rate
than most established businesses, such as those that have their shares quoted on the main market of the London
Stock Exchange. Please remember the value of an investment in these products can fall and you may get back
less than you invested. These products will invest in small companies which, by their nature, will be more likely to
fluctuate in value and may be more difficult to sell than larger companies.
What should I do after April?
The restriction on the annual allowance may mean that it makes sense to reduce your pension contributions from
next April. If that happens you should try to negotiate an adjustment to your pay or benefits package to make up for
the loss. Pension contributions are like extra pay – if your employer cuts your benefits you deserve something
in return.
What should I do next?
The pension regime is highly complex, so it is vital to get expert advice tailored to your situation. Our specialist
financial planners can give you the specific guidance you need – please call 020 3201 3900 or contact your local
Brewin Dolphin office and we will be delighted to help you.
Remember – time could be running out for your pension tax relief, so it is important to act now.
While Brewin Dolphin looks across a wide range of financial products and services in order to meet your needs and
objectives, we will not review all retail investment products in the market. As such we offer a ‘Restricted Advice’ service.
The value of investments can fall and you may get back less than you invested.
All information is for illustrative purposes only and is not intended as investment advice; no investment is suitable
in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation, which
are subject to change.