This case study examines the effect on existing regular contributions where the Pension Input Period (PIP) is already aligned with the tax year, using ‘Fred’ and his Self-Invested Personal Pension Plan (SIPP) as an example to demonstrate allowable contribution levels within the transitional PIP rules and Annual Allowance (AA) for the 2015/16 tax year.
Fred’s PIP for his SIPP was already aligned with the tax year before 6 April 2015 - even so, the ‘two-PIP’ rules announced in this year’s Summer Budget still apply to Fred’s SIPP.
From 6 April 2015, Fred’s employer pays a gross contribution of £2,500 per month into his SIPP, which is received by the SIPP Provider on the seventh of each month. Therefore, between 6 April 2015 and 8 July 2015 (the date of the Summer Budget), four gross contributions totalling £10,000 were made, and as a result of the Summer Budget, Fred’s open PIP closed on 8 July 2015, and a new PIP was opened for him on 9 July 2015, which runs to the end of the tax year.
Under the transitional PIP rules, the Annual Allowance (AA) for the ‘pre-alignment tax year’ (i.e. 6 April 2015 to 8 July 2015 inclusive) was £80,000. Therefore, the total gross contributions made during this ‘mini tax year’ were well within that amount. It is also worth noting that for the ‘post-alignment tax year’ (i.e. 9 July 2015 to 5 April 2015 inclusive) the AA is nil.
"The ‘winners’ from the transitional PIP rules are those who paid £40,000 gross into a pension arrangement during the pre-alignment tax year . . . these individuals now have the opportunity to pay in a further £40,000 gross before the end of the tax year, with no adverse tax consequences."
However, the transitional PIP rules allow up to a maximum of £40,000 gross to be carried over from the pre-alignment tax year AA to the post-alignment tax year (depending on how much of the AA was used during the pre-alignment tax year). As Fred has eight monthly contribution payments into his SIPP amounting to £20,000 to take into consideration during the post-alignment tax year, he still has £20,000 of the £40,000 carried-over allowance remaining.
Fred could, therefore, personally pay in a one-off contribution of £20,000 gross before the end of the current tax year, subject to affordability. As this is a personal contribution, Fred would actually contribute £16,000 and his SIPP provider would then arrange for the basic rate income tax relief of £4,000 to be reclaimed from HMRC and added to Fred’s SIPP fund. Further to this, Fred is a higher rate income tax-payer, and additional tax relief on his personal contribution should be available to him, via the completion of his self-assessment tax return for the 2015/16 tax year.
In conclusion, a total of £50,000 gross could be contributed to Fred’s SIPP during the 2015/16 tax year, without incurring an AA excess tax charge, or having to use any carry-forward, which is £10,000 more than could have been paid under the rules that existed prior to the Summer Budget.
It follows that the ‘winners’ from the transitional PIP rules are those who paid £40,000 gross into a pension arrangement during the pre-alignment tax year (in blissful ignorance of what was to be announced in the Summer Budget). These individuals now have the opportunity to pay in a further £40,000 gross before the end of the tax year, with no adverse tax consequences.
Indeed, these very people may need to maximise their contributions prior to 6 April 2016, given the potential tapering of their AA with effect from that date, or because they will need to apply for Fixed Protection 2016 with the reduction in the Lifetime Allowance to £1 million from 6 April 2016, and so cannot make any more pension contributions, on or after that date.