Tax year end: what's changing with pensions?

It’s that time of year again... tax year end. A time when many of us do our best to make sure we’re prepared for any changes in the financial year to come. If you’re putting money into a pension, there’s probably more to think about than usual as 2016/17 draws to a close. Annual allowances are changing, and there are further changes for taxpayers in Scotland as the Scottish parliament exercises its power to vary taxation.

The annual allowance for pension contributions – how it works

The annual allowance for pension contributions currently stands at £40,000. This applies until you draw down more than the tax-free lump sum which you’re allowed to take from your pension when you reach the age of 55.

This cap applies to the total of your own contributions and employer contributions paid on your behalf.

  • People who have not used their annual allowance for previous years can carry forward unused relief for the previous three tax years, which are 2013/14, 2014/15 and 2015/16.
  • The annual allowance in 2013/14 was £50,000 (it’s stood at £40,000 since then). So people who paid nothing in those years could potentially put in £170,000 this year (£50,000 for 2013/14 and £40,000 for each of 2014/15, 2015/16 and 2016/17).
  •  If you do plan to carry forward unused relief from 2013/14, this must be done by 5 April 2017 and you must pay in the maximum for 2016/17 first.

To get tax relief on such high contributions in one tax year (2016/17), you will have to have earnings high enough to justify those contributions or, more likely, the contributions will be paid by your employer.

Another word of warning: if you earn more than £150,000, including the value of any pension contributions paid on your behalf, the annual allowance is restricted to as little as £10,000 for those with ‘adjusted income ’ (net of certain tax reliefs) of £210,000. You can find out more about this under ‘personal allowances’ on the government’s gov.uk website.

If your income is above £110,000 and you plan to put in large pension contributions, it probably makes sense to get financial advice, as the rules are complicated. 

What’s happening to the Money Purchase Annual Allowance

Up until 5 April 2017, anyone who has accessed their pension flexibly has a lower annual allowance of just £10,000, instead of the £40,000 which otherwise applies.

Flexible access means taking out more than your tax-free lump sum if you have your savings in a new flexi-drawdown plan, or taking income from a flexible annuity that allows payments to be varied. However, you won’t be affected if you were already in ‘capped drawdown’ before 6 April 2015 and you don’t exceed the cap going forward. People who buy ordinary annuities and those who take small pension pots (up to three stand-alone pensions each worth £10,000 or less) will also keep their £40,000 allowance. 

Key change:

From 6 April 2017, it has been proposed that the annual allowance for people who have accessed their pension flexibly will reduce to £4,000.

So, if you have reached the minimum pension age, you have taken more than just your tax-free lump sum and you want to pay in more contributions, then doing so before 6 April 2017 means you can pay in up to £10,000. After 5 April 2017, you can only pay in £4,000.

 Scottish taxpayers and the higher tax rate

Scotland now has the power to vary the rates and limits for income tax and, from 6 April 2017, the limit at which higher rate tax starts will be different in Scotland from the rest of the UK.

Like the rest of the UK, the personal allowance – the first part of income that isn’t taxed – will increase from £11,000 to £11,500.

Key change in Scotland:

Unlike the rest of the UK, the basic rate tax band in Scotland will only be £31,500 from 6 April 2017, meaning that higher rate tax will start to be paid when taxable income reaches £43,000 (£11,500 plus £31,500). In the rest of the UK, the basic rate band will be £33,500 and higher rate tax will start when taxable income reaches £45,000.

For those receiving income in Scotland, for example from their employer or from their pension, this means that anyone earning £45,000 or more will pay an extra 20% tax on £2,000 of their income (£400 extra tax) compared to a similar person resident elsewhere in the UK.

On a more positive note for Scottish taxpayers, someone with taxable income of £45,000 who pays a £2,000 pension contribution will receive tax relief at 40% – whereas a person in a similar position elsewhere in the UK will only receive 20% tax relief.

 You might also be interested in…

> ISAs, JISAs and LISA... making the most of the ‘ISA’ season

>Tax year end money tips

AR01925 03/2017

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