High earners – the race is on to maximise Pension funding

The impending Budget has ramped up the urgency for high earners to top up their pension funding. These individuals may see their annual allowance (AA) cut from £40k to £10k from April. But there is also likely to be an announcement on the outcome of the pension tax relief review on 16 March and there’s no guarantee that 40% or 45% relief will be around forever.

The Government insist that all options are still on the table, including keeping the existing regime untouched. And no-one really knows what the outcome will be. If there are to be major changes to how tax relief is provided, these could take some time to be implemented. But it’s difficult to rule out measures to prevent any ‘buy now while stocks last’ on tax relief until any new rules are introduced.

The cost of delay?

Missing out on current rates of tax relief and allowances could be costly.

  • For example, a move to cap relief at 20% would increase the cost of a £40k pension top-up for a higher rate taxpayer by £8k.
  • And even if 45% relief continues, individuals whose AA drops to £10k from April face a £13,500 loss in available tax relief.

The urgency to maximise funding under the current rules is plain to see.

Identifying which individuals could be caught by the 2016/17 AA cut

It’s not as simple as testing whether gross income exceeds the £150k threshold. That’s because employer contributions are included within the assessment. And there’s an additional test designed to allow some individuals to make larger contributions using carry forward.

The first test (‘adjusted income’)

The standard £40k AA will be reduced by £1 for every £2 of ‘income’ individuals have over £150k in a tax year, until their allowance drops to £10k.

However, it’s ‘adjusted income‘ in the tax year which is tested. This broadly consists of:

  • The individual’s income from all sources before tax (ignoring any deductions for pension contributions); plus
  • The value of any employer pension contributions.

This means the AA cut can affect individuals whose ‘real’ income is well below £150k.

But not every individual who fails this ‘adjusted income’ test will see their AA cut.

The second test (‘threshold income’)

There’s an additional test which can help some individuals to make up for unused AA from previous years by using carry forward to pay more than £40k in the tax year without it reducing the current year’s AA.

Even where adjusted income exceeds £150k, an individual’s allowance won’t be cut if their ‘threshold income‘ is £110k or less for the tax year.

‘Threshold income’ uses the same starting point of total income before tax, but you can deduct individual pension contributions from this and, normally, you don’t add on employer contributions.

The special 2015/16 AA means some individuals may be able to pay double the usual AA this tax year.

A reminder of what can be contributed in 2015/16

From 6 April 2016, all PIPs will be aligned to the tax year. Going forward, all pension savings (both AA and personal tax relief) will always be measured across the tax year. This will make it much easier for the vast majority of individuals to understand how much they can pay into their pension each year.

To prepare for this, the 2015/16 tax year has been split into two ‘mini tax years’ either side of Budget day (8 July 2015). Any open PIP automatically ended on 8 July 2015. A new PIP then started from 9 July and ends on 5 April 2016. All pensions now have the same PIP, which can’t be changed.
  • The total AA for 2015/16 PIPs is £80k.
  • For 2015/16 funding after 8 July 2015, the available AA is any unused part of the £80k allowance (up to a maximum of £40k).

In addition there will still be an opportunity to pay more than the AA by making use of carry forward from earlier years. And because all individuals will now have an input period ending in 2015/16 (even those who made pre-Budget contributions towards what they thought was a PIP ending in 2016/17), they will potentially be able to carry forward unused relief from 2012/13.

This effectively means anything already paid against the 2015/16 AA before 9 July 2015 is disregarded, with a ‘free’ additional 2015/16 AA of up to £40k still available for pension savings from 9 July 2015 to 5 April 2016.

So, many individuals who have already saved into their pension this year will get a second bite at the AA this tax year.



Carry forward of any used part of the post Budget PIP is possible and could even restore the full £40k AA after April for some high earners. But relying on carry forward could potentially mean missing out on tax relief at 45%, depending on the outcome of the tax relief review.

It clearly makes sense to maximise contributions now while relief at the highest marginal rates is definitely available.



Source: Standard Life