The government are introducing pension rules which could leave high earners with unexpected tax bills.
From 6 April 2016, the annual allowance will be tapered from £40,000 for those with earnings of £150,000 or more down to £10,000 for those with income of £210,000 or more.
Income will no longer just be comprised of someone’s salary. It will be “adjusted” to include employer pension contributions or any other income, including savings, bonuses or even buy to let property rental – taking many more people into a higher earnings bracket. The annual allowance will reduce by £1 for each £2 of adjusted earnings above £150,000 until it reaches £10,000.
If employees earning £150,000 or more don’t reduce their pension contributions from 6 April,
they will be taxed at 45% on any excess and face a surprise tax bill.
If people act now, they can reduce the possibility of their tax liability. They can either carry forward any leftover pension allowance from previous years or take advantage of the transitional pension input period (PIP) which will provide the opportunity of making a total payment of up to £80,000 into their pension pot this year.
The lifetime allowance is also reducing from £1.25m to £1m. After April 2016, anyone who breaks through the £1m threshold may be liable to 55% tax on any amount over the limit, if the excess is taken as a lump sum. If any of the excess is instead taken as income, the tax charge is 25%, although the income itself will still be subject to income tax at the recipient’s marginal rate.
Taking into account an annual growth rate of 5%, any individual with a fund currently worth £358,000 with 20 years to go until retirement is likely to hit the £1m ceiling. An unintended consequence is that most “death in service” benefits paid out will also count toward the £1m.
Source: Pensions World
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