Make the right pension contribution decisions

A new tapered ‘annual allowance’ (the amount you can contribute to a pension) is being introduced from 6 April 2016 for individuals with income in excess of £150,000 (this includes pension contributions). The annual allowance will be reduced by £1 for every £2 of income in excess of £150,000. The reduction is capped at £30,000; hence the maximum reduction is from £40,000 to £10,000.

This means that individuals with income of:

  • £110,000 or less will retain the full annual allowance of £40,000
  • £210,000 and above will have an annual allowance of £10,000

Between £150,000 and £210,000 will have an annual allowance of between £10,000 and £40,000. For example if ‘adjusted income’ is £180,000 the calculation is:

£180,000 – £150,000 = £30,000 divided by 2 = £15,000.

The annual allowance will therefore be £40,000 – £15,000 = £25,000.

So – if your income (including investment income) exceeds £110,000 you need to review to ensure you are making the most of the allowance as it stands now.

 An opportunity to put in an extra £40,000 before 5 April 2016

In order to facilitate this new tapered annual allowance all pension input periods are to be aligned with tax years. Transitional rules being introduced mean that all pension input periods open on 8 July 2015 will end on 8 July 2015. The next pension input period will start on 9 July 2015 and end on 5 April 2016. For all new arrangements with a pension input period starting on or after 9 July 2015 the end date will be 5 April 2016.

Individuals who have contributed to a pension arrangement from 6 April 2015 to 8 July 2015 will have additional annual allowance of up to £80,000 (minus whatever they have already contributed).

Consider making the most of the current pension tax legislation and maximise your contributions before 5 April 2016.