Summer Budget
2015
Pension tax
changes
In the Summer Budget 2015 the Government announced changes to the level of the Annual Allowance for
pension contributions for higher earners. The changes will take effect from 6 April 2016. Although the
changes are primarily aimed at those with income of over £150,000, they need to be considered by anyone
with taxable income over £110,000.
A related change is being made to ensure the new rules will work smoothly. As a consequence of that
change, it may be possible for individuals to benefit from an £80,000 Annual Allowance for the 2015/16 tax
year in certain circumstances.
The Government is also consulting on possible further and potentially wide-ranging changes to the pension
tax regime in future years.
The information in this alert is based on the technical briefing papers published by the Government on the
day of the Budget. As such, this overview should be considered preliminary and subject to change based on
the final law.
Reduction in pension Annual
Allowance for high earners
registered pension schemes are not necessarily
aligned with the tax year.
From 6 April 2016, individuals who have taxable
income over £110,000 and taxable income plus
pension inputs over £150,000 (adjusted income)
will have their pension Annual Allowance for the tax
year reduced. The Annual Allowance will be reduced
by £1 for every £2 of adjusted income over
£150,000. Once adjusted income reaches
£210,000, the Annual Allowance will be reduced to
a minimum level of £10,000.
In order to allow the new Annual Allowance rules for
higher earners to work, the Government needs to
align PIPs with the tax year and to do this they are
introducing transitional rules for 2015/16. The way
these transitional rules will work ensures that
nobody is worse off in 2015/16 and in certain
circumstances individuals might benefit from an
increased Annual Allowance for the current tax
year.
The purpose of the £110,000 threshold is to avoid
the need for individuals with taxable income below
that level to carry out the adjusted income
calculation. To prevent an obvious avoidance
opportunity, the £110,000 threshold includes any
income given up under a pension salary sacrifice
arrangement entered into after 8 July 2015.
Based on the Government’s technical note published
on Budget day, we understand that everyone will
have an £80,000 Annual Allowance for 2015/16.
This is split across two periods so that all periods
currently open on 8 July 2015 will end on that date.
A second period will then run from 9 July 2015 to
5 April 2016.
The adjusted income figure includes UK tax-relieved
employer pension contributions and any accruals in
defined benefit pension schemes. The reduction will
not affect the ability to carry forward unused
Annual Allowance from earlier tax years. The Money
Purchase Annual Allowance for individuals who
have accessed pension savings flexibly will not be
affected by this change so will continue to be
£10,000. However, for those affected, the
Alternative Annual Allowance will be reduced.
For the first period the Annual Allowance is
£80,000 and this applies to pension inputs in all
PIPs ending in this period. For the second period the
Annual Allowance is the unused part of the
£80,000 Annual Allowance from the first period up
to a maximum of £40,000.
These rules are likely to create a number of issues
for individuals and their employers, particularly in
relation to defined benefit schemes and non-UK
pension schemes eligible for UK tax relief. For
example, high income members of defined benefit
schemes will be more likely to incur unavoidable
Annual Allowance tax charges and in many cases
both the pension input amount and the appropriate
tapered Annual Allowance may not be known until
after the end of the tax year.
Alignment of all pension input
periods with the tax year
The term ‘pension inputs’ refers to the total of all
pension contributions for an individual. This
includes inputs to registered pension schemes, plus
the deemed value of any defined benefit scheme
accrual and also any increase in UK tax-relieved
funds for that individual in any non-UK pension
schemes. The pension input period (PIPs) for
Pension tax changes
So where an individual’s pension inputs are less
than £40,000 in the period to 8 July 2015, they
will have a further Annual Allowance of £40,000 for
the period to 5 April 2016. If their pension inputs
are more than £40,000 in the period to 8 July
2015, their Annual Allowance for the period to
5 April 2016 will be £80,000 less the pension
inputs in the first period.
It is not clear at present whether or to what extent
pension inputs in respect of non-UK pension
schemes might be affected. Individuals should wait
until the law is finalised before seeking to take
advantage of any potential for an increase in the
2015/16 Annual Allowance.
To simplify the calculation of pension input amounts
for defined benefit and cash balance arrangements
during 2015/16, the pension inputs will be based
on a time apportionment of the increase in pension
rights across the combined PIPs ending in 2015/16.
For defined contribution schemes the pension input
amounts will continue to be the total of any pension
contributions paid in each PIP.
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Any unused Annual Allowance from previous tax
years will remain available to carry forward to
2015/16.
The alignment of all PIPs with the tax year will mean
that it is no longer possible for individuals to claim
tax relief on pension contributions in an earlier tax
year as a result of a mismatch between their PIP
and the tax year.
Updates to previously announced
changes
The Government has also provided an update on a
number of previously announced pension changes,
including:
► A reduction in the lump sum death benefit tax
charge on pension funds transferred on deaths
after age 75 – this will reduce from a flat 45%
rate to the beneficiaries’ marginal tax rates
from 6 April 2016
► A reduction in the value of the Lifetime
Allowance for pension savings – this will reduce
from £1.25mn to £1mn from 6 April 2016
with details of transitional protection still to be
announced
► A delay in the implementation of a secondary
annuities market to enable pensioners to
dispose of their annuities in return for a more
flexible pension fund – following consultation,
this measure has been delayed until 2017 with
further details to be released in Autumn 2015
Unfunded employer financed
retirement benefit schemes
reviewed to ensure it is still the best way to
incentivise retirement saving.
A consultation paper has been published inviting
views on the possibility of a future wide ranging
reform of the pension tax relief regime. The aim of
the consultation is to explore ways in which tax
payers can be encouraged to save for their
retirement whilst taking into account the cost to the
Exchequer of the current pension tax relief system.
The consultation will close at the end of September
2015 with the possibility of further announcements
in the 2015 Autumn Statement or the 2016
Budget.
The terms of the consultation are wide, asking
respondents to consider a possible pension system
reform which meets the following objectives:
► It should be simple and transparent
► It should allow individuals to take personal
responsibility for saving for their retirement
► It should be compatible with the existing
automatic enrolment system
► It should be sustainable for the future
One such reform is the suggestion that pension
contributions could be made from taxed income
with future withdrawals exempt from tax; however,
the consultation equally points out that the best
solution to the above requirements may be that the
current system should remain unchanged.
We would welcome any views on the consultation
from individuals, employers and pension scheme
administrators and invite you to contact any of the
individuals named below in this regard.
The Government will consult on tackling the use of
unfunded employer financed retirement benefit
schemes (EFRBS) to obtain a tax advantage in
relation to remuneration.
Possible future reform of pension
tax relief
The Government has noted that the retirement
landscape has undergone significant change in
recent years. Changes such as the increase in life
expectancies, the shift away from final salary
pensions and the introduction of the new pension
flexibilities have led the Government to conclude
that the system of tax relief for pensions should be
Pension tax changes
3
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How EY can help
Individuals should ensure that they review their pension provision in light
of the new rules on contributions and the existing rules on flexible
pension withdrawals and pension death benefits. We can help:
► High income individuals to consider how they might be affected by
the tapering of the Annual Allowance
► Individuals to consider their pension contributions for the 2015/16
tax year and ensure they are aware of their available Annual
Allowance for the remaining period, taking into account the
transitional rules for pension input periods
► Individuals to review their overall pension contribution and
retirement strategies, to ensure effective use of their pension funds
and any alternative tax efficient savings methods, both during their
working life and following their retirement
► Employers communicate all of these changes to their employees
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Once the Government has announced the transitional Lifetime Allowance
protections, we will also be able to help individuals understand the tax
implications of the options available to protect their pension savings
from a Lifetime Allowance charge.
In addition to the tax implications, there will also be investment
considerations to take into account and individuals should ensure that
they seek financial advice from an FCA regulated advisor.
In line with EY’s commitment to minimise its impact on the
environment, this document has been printed on paper with
a high recycled content.
Information in this publication is intended to provide only a general outline
of the subjects covered. It should neither be regarded as comprehensive
nor sufficient for making decisions, nor should it be used in place of
professional advice. Ernst & Young LLP accepts no responsibility for any
loss arising from any action taken or not taken by anyone using this
material.
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Further information
For further information, please contact one of the following or your usual
EY contact:
Martin Portnoy
[email protected]
0161 333 3275
Elaine Shiels
[email protected]
0121 535 2110
Sarah Traill
[email protected]
0191 247 2813
John MacKay
[email protected]
020 7951 2779
Monica Joseph
[email protected]
020 7783 0835
Gareth Peyton
[email protected]
01582 643 320
Andrew Shepherd
[email protected]
0161 333 2726
Jennine Way
[email protected]
0117 981 2076
Pension tax changes
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