Pensions - time to top up?

16 July 2015

Helen Relf

It seems the Government can’t resist tinkering with the pension rules. Of the various measures introduced in the new Finance Bill , the proposal to restrict tax relief on pension contributions is sure to have a few people thinking. Even more interesting (for those of us who have read the Government’s 124 page 'brief') is the statement that individuals will have an £80,000 allowance for pension contributions in 2015-16.

Previously individuals could receive tax relief of up to £18,000 per year on pension contributions. The new measures, beginning on 6 April 2016, will see the amount of tax relief gradually restricted to a maximum of £4,500 (at current rates) for a taxpayer earning over £210,000. The restriction begins when earnings exceed £150,000 gross and is expected to impact on approximately 300,000 people, earning the Exchequer over a billion pounds in revenue by 2020. An impressive figure from the relatively small number affected!

Many of the 300,000 might be debating making a pension contribution 'while the sun is shining', and they may also have heard rumours of an £80,000 annual allowance for 2015-16. However this is a bit of a red herring – in an effort to simplify the pensions legislation the government are aligning pension input periods ('PIPs') with the tax year. To avoid retrospective taxation, the period 6 April - 8 July 2015 (Budget day) has been given an allowance of £80,000, however only £40,000 of this can be carried forward to the period 9 July-5 April 2016.

For example, total gross pension contributions of £20,000 pre 9 July would allow tax relief on a contribution of £40,000 post 9 July. If you happened to have made total contributions of £40,000 before 9 July then congratulations; you have a further £40,000 available and have achieved the £80,000 allowance for 2015-16. In practice the benefit for most people equates to a 'refreshed' post-Budget allowance of £40,000.

Ultimately while tax savings remain an incentive, a £40,000 pension contribution is a significant investment and a sense of commerciality has to be retained. It is only the highest earners that will see the full restriction on the tax relief available and it remains important to consider pensions not just in terms of tax savings but with a view to broader financial and retirement planning.