There are growing warnings that thousands of people may face an unexpected tax bill as a result of complex rules restricting relief on pension contributions for those earning over £150,000.
Pension provider Prudential is among those sounding alarm bells. It has warned that rules around the tapered annual allowance could lead to people breaching their tax relief limits.
And it says the new rules, which affect people with a threshold income of more than £110,000 and “adjusted income” of £150,000+ are difficult for consumers to follow.
The Prudential says the rules could start affecting individuals who had previously been able to maintain their pension contributions through the use of carry forward.
It’s certainly one of the hot topics at the start of 2018 and here at WNJ we are receiving a rising number of queries on the topic, with savers unsure where they stand and how to tackle the situation.
The danger is that people will maintain their existing contributions without realising they are breaking an allowance limit that is now much lower.
The annual allowance –the total amount that can be paid into defined contribution pension with tax relief claimed – is currently capped at £40,000. Anything over that limit is taxed at the saver’s marginal income tax rate.
However, last April the government created a tapered annual allowance for those earning more than £150,000.
And that means a reduction in the annual allowance of £1 for every £2 that the adjusted income exceeds £150,000 – up to a maximum reduction of £30,000.
Pension experts described it as a “complex” scheme which requires detailed and considered advice for savers, so they are sure what amount they can pay into their pension without falling foul of the annual allowance charge.
Get it wrong and an unexpected tax bill for thousands of pounds could be landing on your doormat. Carrying forward unused contributions from previous years may help some, but not all, people at risk.
It is also important to point out that income from other sources – such as dividends, property and interest are also included in the calculations, as well as employer pension contributions.
Getting the right advice is critical so individuals can see if – and how- the tapering will impact on them and how best to approach the situation.
To discuss any aspect of this article and how the new rules may affect you please contact me on 01772 430000.