Pension Statements

Pension statements have to be sent to all clients that have paid in more than the annual allowance during the tax year. Pension scheme administrators have to send this out to clients for 2016/17 tax year by the 6th October 2017.

Pensions schemes will not calculate the Annual Allowance charge for clients. This is the responsibility of the client for establishing and calculating any Annual Allowance Charge. There maybe some exemptions available to mitigate any tax charge but where a charge arises, you should include the relevant information on your 2016/17 tax return.


What is the Annual Allowance?

The Annual Allowance, set by HM Revenue and Customs (HMRC), is the maximum amount of pension savings, including basic rate tax relief, that can be contributed without potentially incurring a tax charge. The total applies to ALL of your pensions schemes and includes personal, employer and any third party contributions. The standard annual allowance is currently set at £40,000 for the 17/18 tax year, while clients with a lower Money Purchase Annual Allowance stands at £4,000.

Contributions in excess of the Annual Allowance may incur a tax charge at your marginal rate.


Carry Forward?

It may be possible under the ‘carry forward’ rules to contribute an amount in excess of the Annual Allowance and thereby avoid a tax charge. Under these rules, where you have not fully utilised the annual allowances from any of the last three tax years, they remain available to you in the current year.

Where the excess contribution in this tax year is covered by the unused portion of previous tax year’s allowances, no tax charge is incurred and you do not need to show this on your tax return. However, if an annual allowance excess tax charge is due you must notify HMRC via your tax return and calculate the tax due.


The complication of the 2015/2016 tax year

The government announced on 8 July 2015 that all pension input periods will match the tax year (i.e. run from 6 April to 5 April) with effect from 6 April 2016.

They introduced transitional rules for tax year 2015-16 to align existing and new pension input periods during 2015-16 so that all pension input periods are tax year based from the start of tax year 2016-17 onwards.


Tax year 2015-16 split into two ‘mini’ tax years

For annual allowance purposes only, tax year 2015-16 was split into two ‘mini’ tax years:

The pre-alignment tax year – The annual allowance for contributions made during the pre-alignment tax year is £80,000, plus any available carry forward. (see below)

The post-alignment tax year – The annual allowance for contributions made during the post-alignment tax year is the amount of the £80,000 that has not been used from the pre-alignment tax year, subject to a maximum of £40,000, plus any remaining available carry forward allowances.

If contributions are paid within the correct dates it is possible to have a maximum annual allowance of £80,000.


Carry Forward unused Annual Allowance from the 2015/2016 Tax Year

Carry forward unused allowance will be affected by the summer budget changes and the aligning of input periods. The amount available to be carried forward into the 2016/2017 tax year is the unused annual allowance of the Post Alignment tax year.

Example one

Max Annual AllowanceContribution Made
Pre Alignment tax year£80,000£40,000
Post Alignment tax year£40,000£15,000

The amount that could be carried forward to 2016/2017 tax year is £25,000.


Example Two

Max Annual AllowanceContribution Made
Pre Alignment tax year£80,000£60,000
Post Alignment tax year£20,000£15,000

The amount that could be carried forward to 2016/2017 tax year is £5,000.


Tapered Annual Allowance

From 6th April 2016 the annual allowance was reduced for those with ‘adjusted incomes’ of over £150,000. The annual allowance will be reduced by £1 for every £2 of income they have over £150,000. The annual allowance will not fall below £10,000.

Adjusted IncomeReductionNew Annual Allowance


Adjusted income

Adjusted income includes taxable earnings and all pension contributions (including employer contributions), but does not include charitable contributions.

Example – Amy has a salary of £130,000 and her employer contributes £30,000 into her pension. Her adjusted income will be £160,000 and will lower her annual allowance to £35,000.


Threshold Income

Those with income, excluding pension contributions, below a £110,000 threshold will not be subject to a Tapered Annual Allowance.

Example – Michael has a salary of £105,000. His employer makes a contribution of £55,000. His adjusted Income is £160,000. His Annual Allowance will not be reduced as his income is below the £110,000 threshold.

Anti-avoidance rules will apply so that any salary sacrifice set up on or after 9 July 2015 will be included in the threshold definition.

Pensions schemes will not know your clients adjusted income so will base the pension statements on the standard £40,000.


Request that the Scheme pays the tax charge

Clients can request that their pension scheme administrators pay the tax charge out of the client pension funds. There are a number of criteria that must be made which include that the tax charge is over £2,000 and they are notified by 31st July 2018 for 2016/2017.

By Michael Baber | September 15, 2017 | 0 Comments

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