There is a major restriction to tax relief for pension contributions coming into effect on 6 April 2016, which your clients may need to prepare for. Employers and individuals also need beware of the introduction of the Scottish rate of income tax, which will have repercussions far south of the Scottish border. Finally we have some good news for small innovative companies as claiming R&D tax relief should become easier very soon.
This is an
extract from our topical tax tips newsletter dated 5 November 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
From 6 April 2016 the annual allowance (AA) for pension contributions will be cut from £40,000 to a minimum of £10,000. The Government says this change will only affect “top earners”, but that is misleading.
Individuals with “adjusted income” in excess of £150,000 will have their AA tapered down by £1 for every £2 over that income threshold, until a minimum AA of £10,000 is achieved. If pension contributions are made which exceed the tapered AA for the year, an annual allowance charge will apply on the excess contributions at the taxpayer’s highest rate of income tax.
To avoid an unwelcome AA charge the taxpayer needs to calculate his adjusted income before making large pension contributions in the tax year, but that may prove to be impossible.
Adjusted income comprises: all of the taxpayer’s taxable income, including income from property, interest, and dividends, plus any pension contributions made by the individual’s employer on his behalf, (F(no.2)A 2015, Sch 4, Pt 4). Anyone with a variable income will find it very difficult to calculate their adjusted income before the end of the tax year. For example professional partnerships, even those with a year end of 30 April 2016, will take eight or nine months to approve and finalise the partners’ profit shares for 2016/17.
High earning employees should to talk to their employers to ensure that where their pension contributions are matched by an employer’s contribution, the total does not exceed their tapered AA. The individual may need to opt out of the company pension scheme and negotiate compensation for that opt-out.
Your client may also consider transferring income-generating assets such as property or shares to a lower-earning spouse/civil partner before 6 April 2016. Remember a transfer to an unmarried partner will trigger a disposal subject to capital gains tax.
A third option is to maximise pension contributions in 2015/16 by making use of any unused AA brought forward from the previous three tax years.
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