Steve Smith Live: Budget July 2015 (1)

The biggest area of interest and change related to the subject of pensions. The following is an overview of the key points.

Annual Allowance

The annual allowance for high earners will be reduced to between £10,000 and £40,000.

Higher Earners Tapered Annual Allowance

The reduced annual allowance will affect those with both 'adjusted income' of more than £150,000 and 'net income' of more than £110,000.

‘Adjusted income’ includes employer and employee pension contributions. ‘Net income’ excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July 2015. This is to prevent tax avoidance. Where adjusted income and net income exceed the respective thresholds, the taxpayer's annual allowance will be reduced by £1 for every £2 of adjusted income in excess of £150,000. The maximum reduction is £30,000, which would result in an annual allowance of £10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is £210,000.

All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period. The Government will consider at a later date if this can be simplified further by removing pension input periods altogether. The alignment of pension input periods with the tax year will be achieved by ending all open periods on 8 July 2015. A further pension input period will then cover the period from 9 July 2015 to 5 April 2016. To ensure no tax charges arise against those who had fully funded their pensions in advance of the Budget, the total annual allowance for this tax year will be increased to £80,000, only £40,000 of which is available to cover pension input amounts paid after the Budget.

‘Carry forward’ will be available as normal, but will be based on the tapered annual allowance rather than the standard annual allowance.

The money purchase annual allowance of £10,000 will still be available. However, taxpayers who are affected by both the money purchase annual allowance and the tapered annual allowance will retain the £10,000 money purchase annual allowance but will suffer a reduced annual allowance for funding non-money purchase schemes.

Lifetime Allowance (LTA)

The LTA will reduce to £1 million for 2016/2017 and 2017/2018. There will be a new round of transitional protection. However, we still await the detail on this.

The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019.

Those who want to apply for Individual Protection 2014 must do so online by 5 April 2017.

Tax Relief

Other than for higher earners as noted above, there's no change to the rate of tax relief for member contributions, which will continue to be based on the individual’s highest marginal rate.

Pension Tax Relief Reform

The Chancellor said he was ‘open to further radical change’ in the pension industry. A Green Paper/Consultation has been announced which will look into possible new radical approaches such as ISA-style pensions where people would lose the tax relief when they pay in, but would be able to take their money out tax free. More subtle changes will also be considered, such as further adjustments to the annual or lifetime allowances. Responses are due by 30 September 2015.

Extension of Freedom & Choice Agenda To Existing Annuitants

The ability to sell annuities in payment is being deferred for a year, from April 2016 to 2017. This is in line with industry calls for it to be introduced over a more sensible timescale. The Government will set out its plans for the secondary annuities market in the autumn.

Lump Sum Death Benefits

The change in taxation of lump sum death benefits for members who die aged 75 or over was confirmed. Currently a temporary flat rate tax of 45% is applied. From 2016/2017 this rate will reduce to the beneficiary's marginal rate of income tax.

As expected, where payments are made to a discretionary trust the rate of tax will remain at 45%.

Pension Transfers

The Government plans to consult shortly on pension transfers. They want to make the process quicker and smoother and to look at excessive penalties. The aim is to ensure people can access the new pension flexibilities easily and without excessive costs.

Salary Exchange

Whilst there were no changes to salary exchange the Government noted that these arrangements are becoming increasingly popular and so increasingly costly to the tax payer. The Government stated that it will actively monitor the growth of schemes and the impact on tax receipts.

GENERAL IMPACT

Those who had paid less than £80,000 between 6 April 2015 and 8 July 2015 can make further contributions without exceeding the annual allowance. The maximum contribution that can be made without an annual allowance tax charge arising is the amount of the unused £80,000 annual allowance for the tax year, up to a maximum of £40,000 plus carry forward.

Higher rate taxpayers with adjusted income below £150,000 or net income below £110,000 will still benefit from higher rate relief on contributions of up to £40,000 a year. With further potential restrictions to tax relief being considered, those with sufficient funds could consider funding sooner rather than later while full tax relief is still available.

The reduction in the Lifetime Allowance to £1 million from 6 April 2016 will greatly widen the scope of those within the restrictions. While the introduction of index -linking from April 2018 is welcome, it’s far short of a return to the £1.8 million LTA in place in 2011/2012 which itself was originally intended to rise in line with inflation.

Steve Smith Live