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Budget 2017: Considerations for high earners

Published by Bhargaw Buddhdev on

It is inevitable rumours and speculation have now started to circulate about what the Chancellor might do in the first autumn budget.  Will it be a raid on higher earners (generally older workers) to fund a cut in National Insurance Contributions for younger workers by introducing a single-rate of pensions tax relief?  Or, with Brexit predominating matters and consuming Government time for other legislative programmes, will the Chancellor take a simple approach by retaining the current system but further reducing the Lifetime Allowance (LTA) and specially the Annual Allowance (AA)? 

With just a couple of weeks until the autumn budget on 22 November, the rumour mill is rumbling - will this be the budget that sees a curtain call for higher rate pensions tax relief?

Whether or not the reforms happen, the rumours are a reminder that now is the time to review your pension contributions.

Anyone planning to make pension contributions in the 2017/18 tax year should consider paying them before 22 November.

AA/LTA calculator

Our AA/LTA calculator can help you estimate your tapered Annual Allowance and the amounts of tax relievable pension contributions (to DC arrangements).

The AA/LTA calculator has been updated for the tax year 2017/18. It allows individuals to estimate the amount of tax relievable pension contributions (to defined contribution arrangements) they are able to pay in 2017/18, 2018/19 and 2019/20.

By inputting details such as individual’s earnings and past pension savings, they can see the results of

  • whether their AA will be tapered (i.e. reduced to below £40,000),
  • the scope to make more tax relievable contributions or
  • how much AA tax they may incur.

Individuals can update assumptions on future salary increases, pension contributions and investment returns on their Defined Contribution (DC) funds.

It can also be used to estimate the value of their pension savings (both defined contribution and defined benefits) for testing against the Lifetime Allowance at selected retirement age.

Estimate your tapered Annual Allowance

Use our AA/LTA calculator can help you estimate your tapered Annual Allowance and the amounts of tax relievable pension contributions (to DC arrangements).

Money Purchase Annual Allowance

The Money Purchase Annual Allowance (MPAA) applies to individuals who have flexibly accessed their pension benefits.

The government introduced MPAA to limit recycling of cash through their pension.  This restricts the total amount of contributions that can be paid to their money purchase arrangements without incurring a tax charge.

The MPAA was £10,000 for the 2016/17 tax year and is expected to reduce to £4,000.  The reduction had to be dropped from the Finance Act 2017. This was due to the lack of parliamentary time it took to consider it properly (which was a result of the ‘snap’ general election being called earlier this summer). The reduction has since been drafted into a second finance bill with retrospective effect from 6 April 2017 – and, although there is still time for the Chancellor to pull that particular plug, he will be reluctant to incur the wrath of taxpayers who were forced to act early to avoid a large tax bill.

Carry-forward of AA rules do not apply to the MPAA.

Scheme pays

The tapered AA continues to create problems for senior staff.  Where a member is subject to tapered AA, they may be liable for an AA charge even if the value of their pension savings has not exceeded the standard £40,000 AA.  In this case they do not qualify for ‘mandatory’ scheme pays and would be required to pay the whole of the AA charge themselves (unless the scheme is willing to offer voluntary scheme pays). 

The rules on a pension scheme meeting an individual’s AA charge through ‘scheme pays’ are complex with strict deadlines for notification to the trustees (or administrator of the pension scheme).

The time limits are even tighter where scheme pays is allowed on a voluntary basis.  Individuals who wish to use the voluntary facility for any of their 2016/17 AA tax charge will need to check the deadline with the scheme administrator to ensure applications can be processed on time.

Wild and extreme budget speculation

Would the Chancellor end the national insurance exemption on pension contributions from employers? This cost the government £15.7bn in 2015/16 as auto-enrolment ramped up and stripping away this relief would heap the cost on corporates without hitting employees directly.

The Chancellor should take note that further reductions of pensions tax relief and introduction of any restriction to or ending employer national insurance exemption is expected to lead to corporate decision-makers disengaging from workplace pensions, impacting Government’s plans for improving retirement savings.

Expert help is on hand

Are you a senior individual who needs help with their pension arrangements? Our experts are on hand to help.

About the author

  • Bhargaw Buddhdev

    Bhargaw Buddhdev is a pensions actuary and he is our expert for dealing with pension taxation issues for individuals and their employers.

    View Biography

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