Higher earners could be subject to a new tax charge from today, (6 April 2016) following the introduction of a tapered annual allowance that will reduce the amount of money they are able to contribute into a pension.
The complex new system will see those people with a taxable income over £150,000 face a reduction to their £40,000 annual pension allowance.
New tax charge on higher earners' pensions
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Higher earners could be subject to a new tax charge from today, (6 April 2016) following the introduction of a tapered annual allowance that will reduce the amount of money they are able to contribute into a pension. The complex new system will see those people with a taxable income over £150,000 face a reduction to their £40,000 annual pension allowance. This reduction will be at a rate of £1 for every for every £2 of taxable income in excess of the threshold. This tapering ceases once taxable income hits £210,000, leaving the individual with an effective annual allowance of just £10,000. In a worst-case scenario, Hargreaves Lansdown says this could land an individual with an income of £210,000 with a £13,500 tax bill, following the loss of £30,000 worth of their annual pension allowance. Check how much you’ll earn now Nathan Long, senior pension analyst at Hargreaves Lansdown, warns that the complex new system will make it incredibly difficult for higher earners to calculate how much they can pay into their pension without getting stung by a large tax bill. He says: “High earners will now need either a crystal ball or the benefit of hindsight to navigate the new annual allowances rules. Few people know their total year’s income from work, savings and investments in advance. However, those with total annual income above or around £150,000 need to be alive to these changes, or else risk a nasty tax surprise.” In practice, Hargreaves Lansdown says this means anyone earning more than £110,000 should find out whether they will be affected once all income streams are taken into account. Mr Long adds: “Higher earners should prioritise tallying up their expected income for the year, work out if they could be caught by the new rules and plan accordingly. Simply remaining a member of a company pension scheme could increase tax bills – so employees in particular should act now by discussing the options with their employer.” How to beat the tapered allowance However Mr Long says there are some steps higher earners can take to protect their retirement savings. For example making use of carry forward rules, which allow you to pay any unused allowance from the previous three tax years in the current tax year (2016/17) - this could give you an additional £130,000 to pay into your pension. He also says employers may be able to offer some flexibility. “Contributions to your workplace pension could push you over your new lower allowance, but your employer may offer different solutions to help you out. “This could include offering cash in lieu of pension contributions or potentially having them re-directed into an ISA or investment account so you can continue saving for retirement.” In addition, Mr Long says married people could beat the change by pumping money into a spouse’s pension. “If your own pension allowance is trimmed back it may be possible to fund for your spouse.” he explains.
Source Moneywise http://ift.tt/1Xgtd5P
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