Each tax year the total amount you can contribute to pensions, or anyone else can contribute on your behalf, is effectively limited by the Annual Allowance. Once you exceed the Annual Allowance, the contributions are subject to a tax charge. The Annual Allowance is usually £40,000.
To date it has not always been straightforward to determine which year's allowance a pension contribution would count towards. This is because different pension schemes have had different 'pension input periods' and pension contributions count towards the Annual Allowance in the tax year in which the pension input period ends. This could have been different from the tax year in which the pension contribution was actually made.
To address this, in this year's Budget the Chancellor announced he would bring all pension input periods in line with the tax year. To achieve this, all open pension input periods were closed as at the date of the Budget (8 July 2015). The next pension input period for all pensions was then set as 9 July 2015 to 5 April 2016. Thereafter, all pension input periods will run in line with the tax year.
This means that for 2015/16, the tax year is effectively split into a 'pre-alignment tax year' ending 8 July 2015 and 'post-alignment tax year' ending 5 April 2016. All individuals have an Annual Allowance of £80,000 for the pre-alignment tax year. Where this has not been used in full, the remainder will be carried forward to the post-alignment tax year subject to a maximum of £40,000. In addition any unused Annual Allowance from the previous three years can still be carried forward, as allowed for under the existing carry forward rules.
For defined benefit pension schemes such as the NHS pension, the pension input amount for both periods combined will be calculated at the end of the tax year then split proportionately between the two mini tax years.
If you would like to discuss your pension planning, please contact us on email@example.com or 0117 966 5699.
A reminder that from April 2016, if your income is over £150,000 (including the value of any pension contributions) you will be affected by a tapered reduction to your Annual Allowance.