Prior to the Budget, the amount people expected to be able to contribute to their pensions this tax year was a maximum of £40,000. However, because of an anomaly in the pension system, a one-off change was made that means those that can afford it can put in as much as an additional £40,000 into their pensions, even if they’ve paid £40,000 in already.
This though, ends at the conclusion of the 2015/16 tax year on 5th April 2016.
A rare opportunity to contribute
This rare opportunity materialised from a desire by the government to align its annual limit for pension contributions with the tax year. As the Government announced this at the Budget on 9th July 2015, the 2015/16 tax year has been split into two windows. There was an initial window that ran from 6th April 2015 to 8th July 2015; in which the Government has allowed contributions up to £80,000. The second window, allowing up to a further £40,000 to be contributed (capped at a maximum of £80,000 for the year), opened on the 9th July 2015 and closes on 5th April 2016.
Those who didn’t maximise their £80,000 allowance in the first window can use the current one to further top up their pensions. The maximum top-up in the second window is £40,000, but if you’d already paid in more than £40,000 in the first window your combined total can’t be more than £80,000. So, for example:
In the first example above, the saver can only pay in £20,000 because the combined amount for the two periods can’t be more than £80,000.
In addition to this, anyone who hasn’t maximised contributions over the previous three tax years can put these in too – potentially allowing up to £140,000 more for those who can afford it.
It’s important to note that to make the full contribution of £80,000 in a tax year you must have earnings of the same amount or higher. So, if you earn £40,000, the maximum you can contribute this tax year is £40,000. This though, could be a great opportunity for someone who is actively investing in their pension as part of a long-term, considered plan.
If you’re unsure about any of this and how much you can contribute, you should speak to a financial advisor.
Could higher rate tax relief be set to go?
It appears likely that the Chancellor will announce changes to the higher rate tax relief available on pension contributions, with many commentators expecting a flat rate of tax relief applicable to all. This could wipe out the 40% tax relief for higher rate tax payers and the 45% for top earners. The proposed new flat rate has been speculated as sitting between 25% and 33%.
Whilst the change to higher rate tax relief is not yet confirmed, what we do know is that the Chancellor is introducing plans to impact the very highest earners by a change in the amount of their annual pension contribution allowance from 6th April 2016.
Those with income of more than £150,000 could see a reduction in the allowance available to them with a sliding scale being applied to their annual limit for the 2016/2017 tax year.
The calculation of income is complex. It isn’t simply based on earnings from employment or self-employment, meaning that the highest earners may need to consult a financial adviser or accountant to establish exactly how much they can pay into their pension.
Ellen Bruno, Head of product at TD Direct Investing, commented on the expected changes in the Budget:
“The government wants to reform the pension tax system and the impact is set to be felt by higher rate tax payers. With the coming reduction in allowances and potential reduction to higher rate tax relief, alongside this one-off opportunity to maximise pension contributions, our message to those already considering topping up their pensions is that they may wish to consider doing so before the Budget.”
If you’ve already got a TD SIPP you can start contributing today so you don’t miss out.
If you haven’t got one, find out more about how to open a SIPP with TD and start making the most of this opportunity.
TD Direct Investing does not provide tax advice. Please note tax treatment depends on the individual circumstances of each customer and may be subject to change in the future.
The investments made within a TD SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (57 from 2028).
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