I am long enough in the tooth now to remember various changes to the way pension contributions are dealt with by the tax system. Pensions simplification, A-Day and the like.
Today, the one tax related question that brings me out in a cold sweat more than any other is, “what is the maximum I can pay into my pension this year?”. Just typing it brings a small tear to my eye.
It has been getting harder to answer this question for a little while; starting with reducing the annual pension allowance, then increasing in complexity in 2015/16 with the alignment of ‘pension input periods’ and the need to split 2015/16 into pre and post 8 July 2015 contributions. But then came the restricted annual allowance for those with ‘adjusted income’ over £150k, but with regard to ‘threshold income’ of £110k, but don’t forget the carry forward, oh and are there enough relevant earnings, and is that net or gross and what about company contributions – and along came a whole new raft of ways to get it wrong.
What is going on? How did we get to the point where this question is sometimes harder to answer than one about quantum entanglement?
Ok, I exaggerate a little as it is quite straight forward to answer if income is definitely less than £110k, or earnings are low and so contributions are not dependent on the convoluted annual allowance calculations. However, for those where income is higher it can be a nightmare. A conversation with, say, a self-employed individual with some additional employment income or a directorship may go something like this following the asking of THAT question for 2017/18:
“It depends on your income for the year.”
“How should I know what that will be – I never know until sometime after the end of the year; about £180k perhaps?”
“Well, the annual allowance would be restricted to £25k. But that will change if your income is not exactly £180k – it could be more or less than £25k.”
“Thanks for that!”
“Looking back you haven’t fully utilised your annual allowances in the past three years so you could pay more than that amount.”
“Yes, I paid in £2k per month in the last three years plus a £3k lump sum each year.”
“Is that net or gross?”
“It’s what I actually paid.”
“Net then. So your contributions were £33,750 gross each year. To work out the carry forward relief for 2016-17 we have to consider the restricted annual allowance for that year, but we can’t do that until the tax return is completed, for 2015-16 we need to consider the pre and post alignment periods and for 2014-15 we need to understand what the pension input period was – actually we need that for the beginning part of 2015-16 as well. We may need to look back 2013-14 to work out the position for 2016-17 properly.”
“Does your employer make any contributions? Salary sacrifice? Defined benefit scheme?”
“If you can pay in more than £70k (gross) so that your income is less than £110k (based on your estimated income) then the annual allowance for 2017/18 is not restricted after all. But we need to be clear on whether your income will be £180k first.”
“What? If I contribute more, then I can contribute even more, as it means I am not then affected by the rules that mean I can’t put that much in?”
“Well, yes. But we can’t tell at this stage if you can pay enough in. You might be better off paying in less in 2017/18 to preserve your carry forward capacity for 2018/19, when your income might be lower, meaning that you might be able to pay in more to get below the threshold limit to reinstate the annual allowance for 2018/19, thus meaning that you could pay in more in 2018/19 and increasing the maximum across the two tax years.”
“Are you ok? Anything else I need to worry about!?”…somewhat sarcastically.
“What you also need to consider is the lifetime allowance. What are your pension funds worth? What will they be worth when you retire? You could look at taking out fixed protection…”
And so it goes on.
I have had these types of conversations in one form or another and they are painful.
One interesting scenario is where both partners in a house with child benefit have similar income of around £60,000. In advising the higher earner to make a contribution to reinstate the child benefit, he or she becomes the lower earner and the problem switches to the partner. Defined contributions schemes, such as the NHS pension, are also particularly interesting to advise on, as is the interaction of the annual allowance with the new finance cost restrictions for let properties, or explaining that the dividend allowance isn’t an allowance at all.
It is bloated with complexity. People need to be able to at least have some certainty over how much they can pay into their pension without a tax charge, and in some cases that is simply not a realistic possibility.
In the meantime, we are here to guide those who need advice – although we may need a lie down afterwards.
Quantum physics anyone?