2015-2016 PIP Rules.
The Pension Input Period (PIPs) rules are to be simplified so that all pension funding is measured across the tax year from 6 April 2016. Aligning all PIP with the tax year makes it much easier for the vast majority of individuals to understand how much they can pay into their pension each year.
In order to get PIPs aligned means a year of transitional rules and short lived complexity. But the pain is soothed by the possibility that some individuals may be able to pay an additional £40,000 into their pension before 6 April 2016 as a result.
Here’s how the 2015/16 rules will operate in practice.
The 2015/16 tax year is split into two ‘mini tax years’ either side of the Budget. Any open PIP automatically ends on 8 July 2015. A new PIP then starts from 9 July and ends on 5 April 2016.
You could also have had a PIP already end in the period of 6 April 2015 to 7 July 2015. So there could be one or two PIPs that relate to the first part of the year, and just one that relates to the second.
The total annual allowance for all the PIPs that relate to the first part is £80,000.
The available annual allowance for the PIP that relates to the second part is the remainder of the unused £80,000 from the first part, but up to a maximum of £40,000.
Existing regular contribution, PIP already aligned to the tax year
Even though this is already aligned to the tax year, the rules splitting the PIP around Budget day still apply.
Reed was looking to pay (almost) the maximum £40,000 during the 2015/16 tax year, as £3,333 per month. His payment date was the 15th every month.
From 6 April 2015 to 8 July 2015 he paid three contributions totalling £9,999. Due to the Budget, his input period closed on 8 July and a new one started on 9 July that runs to the end of the tax year.
The annual allowance for the first part is £80,000, so his contributions of £9,999 are well within that. He has £70,001 of the annual allowance left.
For the second part, the available annual allowance is what remains of the £80,000 annual allowance in the first part, up to a maximum of £40,000. As £70,001 was unused, the maximum of £40,000 is available.
So Reed’s regular contributions will continue for the remaining nine months. These will total to £29,997. This means he will still have £10,003 of the £40,000 allowance remaining, so he could either increase his regulars slightly, or do a one-off top up before the end of the tax year.
So Reed could pay a total of (£9,999 + £40,000) = £49,999 within 2015/16 without incurring an annual allowance charge or having to use any carry forward. This is £9,999 more than he expected.
New plan set up in May, £40,000 already paid for the 2015/16 tax year
Sue set up a new scheme on 1 May 2015 and paid a single of £40,000 to use up the 2015/16 annual allowance. The input period would normally have run until 5 April 2016.
Sue’s input period now closed on 8 July 2015 and she has a second PIP running from 9 July 2015 to 5 April 2016.
For the second part, the available annual allowance is what remains of the £80,000 annual allowance in the first part, up to a maximum of £40,000. Sue used up £40,000, so has the maximum £40,000 remaining.
So Sue could pay another £40,000 for the 2015/16 tax year, giving a total payment of £80,000 without having to use carry forward. This is £40,000 more than she expected to be able to pay.
Existing plan, PIP not aligned to tax year, 2015/16 annual allowance already used, some of 2016/17 already used
Johnny has an existing scheme with a PIP that runs 1 May to 30 April. For the PIP that ran 1 May 2014 to 30 April 2015 he used the full £40,000 for the 2015/16 tax year.
The next PIP would have run from 1 May 2015 to 30 April 2016 and would have related to the 2016/17 tax year. He had already paid £20,000 as single and was planning to top it up in March when his bonus was due to be paid.
But due to the Budget, the PIP that started on 1 May 2015 was closed on 8 July 2015 and a new PIP started from 9 July 2015, running until 5 April 2016.
So Johnny has two PIPs that relate to the first part of the year and the total contributions in these are £60,000.
The annual allowance for the first part of the tax year is £80,000, so the £60,000 contributions are fine and leave £20,000 allowance remaining.
The available allowance for the second part of the year is the remainder from the first part up to a maximum of £40,000. In this case the remainder is £20,000. So Johnny could still put another £20,000 in before the end of the tax year.
The benefit to Johnny is that he’s no longer using any of the 2016/17 annual allowance. He’d already paid £40,000 for the current tax year, and the £20,000 he thought he was using of next year’s allowance has now been brought back to this year. And he could still make another £20,000 by the end of the tax year. So a total of £80,000 could be made that would be relating to the 2015/16 tax year. And from 6 April 2016 he would have a new £40,000 annual allowance available.
He was expecting that he could make another £20,000, but thought he had up until the end of his original PIP (30 April 2016) to make it – now the deadline is 5 April 2016. He had thought that further contributions could be made from 1 May 2016 that would be relating to the 2017/18 annual allowance. Now his new contributions can start from 6 April 2016 and will relate to the 2016/17 annual allowance (which is all still available for him).
Existing plan, PIP not aligned to tax year, annual allowances of both 2015/16 and 2016/17 already used
Ben maximum funded at the start of the 2015/16 tax year as his company wanted to make an £80,000 contribution. He had no carry forward so it was split over two PIPs.
The first payment was made on 20 April 2015, and a lump sum of £40,000 was paid. The input period was then closed on the 25 April 2015, rather than letting it run to 5 April 2016. The new input period started on 26 April 2015 and another £40,000 contribution was paid. This new PIP would normally have run until 25 April 2016, ending in the 2016/17 tax year.
However, thanks to the Budget, the second input period now ended on 8 July 2015.
Ben’s original PIPs were:
|PIP 1||20 April 2015 to 25 April 2015||£40,000||2015/16 annual allowance|
|PIP 2||26 April 2015 to 25 April 2016||£40,000||2016/17 annual allowance|
But now they are:
|PIP 1||20 April 2015 to 25 April 2015||£40,000||2015/16 annual allowance|
|PIP 2||26 April 2015 to 8 July 2015||£40,000||2015/16 annual allowance|
|PIP 3||9 July 2015 to 5 April 2016||£0||2015/16 annual allowance|
The annual allowance for the first part of the year, to which PIPs 1 and 2 relate to is £80,000. So he has used up all of the allowance. There is no allowance to support any contributions in PIP 3, from 9 July 2015 to 5 April 2016. But this is as expected, as Ben thought he had used up both his 2015/16 and 2016/17 annual allowances, and wouldn’t be able to pay any more until 26 April 2016 when his new PIP for the 2017/18 tax year was due to begin.
But now Ben can start to contribute from 6 April 2016 and this will be in relation to the 2016/17 annual allowance, of which he now still has the full £40,000 available.
What Ben won’t be able to do in future is to close an input period early to get access to the next year’s allowance. For the 2016/17 tax year he can make £40,000 but nothing more until 6 April 2017.
PIP not aligned to tax year, already used carry forward for contribution in relation to 2016/17
Alicia has a SIPP that she’s been funding over the years with varying single contributions, but without fully using all her allowances. The PIP runs from 1 June to 31 May.
As Alicia was a high earner, she was concerned about the rumoured changes to the annual allowance. She had the available funds and decided to make a large contribution before Budget day.
Her current input period started on 1 June 2015 and would have ended on 31 May 2016, so she knew that any contribution she made would be tested against the 2016/17 annual allowance. She wanted to make a larger payment than just the £40,000 so she looked back to see how much unused annual allowance she could carry forward the three previous tax years.
As her current input period related to 2016/17, she could look back at the tax years 2013/14, 2014/15 and 2015/16.
|PIP 1||1 June 2012 to 31 May 2013||2013/14||£45,000||£5,000|
|PIP 2||1 June 2013 to 31 May 2014||2014/15||£25,000||£15,000|
|PIP 3||1 June 2014 to 31 May 2015||2015/16||£30,000||£10,000|
Based on the contributions she’d paid during the PIPs that related to those tax years, she calculated she had £30,000 unused.
So on 16 June 2015 Alicia made a contribution of £70,000. This was £40,000 for the PIP relating to 2016/17, and the £30,000 of carry forward from 2013/14 – 2015/16.
However, with the Budget changes, Alicia’s PIP that she thought was going to end in 2016/17 is now brought back to the current year. She also already had a PIP close in 2015/16, so she has two pre-Budget PIPs.
- PIP 1, 1 June 2014 to 31 May 2015 – £30,000 paid;
- PIP 2, 1 June 2015 to 8 July 2015 – £70,000 paid.
So she made a total contribution of £100,000 against the transitional annual allowance of £80,000, meaning that £20,000 is over the available allowance. But this can still be cleared with carry forward.
The change to the PIPs has an unexpected benefit for Alicia – the contribution she thought she was making in respect of 2016/17 is now brought back to 2015/16. And this means that for carry forward purposes, she can now go back one further year, to 2012/13.
So three years prior to 2015/16 look like this:
|PIP 1||1 June 2011 to 31 May 2012||2012/13||£30,000||£20,000|
|PIP 2||1 June 2012 to 31 May 2013||2013/14||£45,000||£5,000|
|PIP 3||1 June 2013 to 31 May 2014||2014/15||£25,000||£15,000|
There is £20,000 of unused allowance in this newly available year, 2012/13, which can be carried forward to cover the excess in the pre-Budget PIPs of 2015/16. So there is no annual allowance charge to pay on the £100,000 that’s been paid in relation to the pre-Budget 2015/16 PIPs.
Now what does this mean for Alicia in relation to the post-Budget input period that runs from 9 July to 5 April 2016?
The annual allowance for this PIP is whatever remains of the £80,000 from the pre-Budget PIPs up to a maximum of £40,000. There’s nothing left of this as the maximum £80,000 (plus £20,000 of carry-forward) was paid in the two PIPs that ended pre-Budget, so Alicia has no annual allowance for the second part of 2015/16.
But she does still have carry forward.
Because of all these changes, she hasn’t actually had to carry forward the unused amounts from 2013/14 and 2014/15, so these are still available. So she can carry forward the £5,000 from 2013/14 and the £15,000 from 2014/15 to make a total payment of £20,000 in this new input period.
So Alicia had initially planned to pay £70,000 as a lump sum to use up the 2016/17 annual allowance and the carry forward from previous three years, but the changes mean that the payment now hasn’t touched the 2016/17 allowance, she’s had access to an additional year for carry forward and can pay an additional £20,000 before the end of 2015/16.
Source: Standard Life