Why, we’re talking about pensions, of course. What were you thinking?
This summer’s Budget was full of changes, some finalised and others still in discussion. The main things to come out of it are the reforms to inheritance tax, the introduction of a new National Living Wage and changes to the weird and wonderful world of pensions. We’ve already worked our way through the first two, so here’s the third.
The Annual Allowance
As of April 2016, the Annual Allowance will be tapered for those with an adjusted income of over £150,000. After reading that, you might be wondering one or all of three things: what’s an adjusted income, what’s the Annual Allowance and how will it be tapered? Well…
- The Annual Allowance is the amount of money you can put into your pension pot tax free. It’s currently set at £40,000 – down by £10,000 from last year. So, whatever you pay into your pension, per year, above this amount will be taxed. But if you’ve any unused Annual Allowance from the previous three tax years, then you can use that to top up your current Annual Allowance. And this means that more of us may have to pay tax on our pensions savings.
- Adjusted income includes your taxable earnings, and both your employee and employer pension contributions. But is doesn’t include any charitable contributions you may have made.
- And finally, the taper. What’s being proposed is that for every £2 of your adjusted income over £150,000, your Annual Allowance will be reduced by £1. But this doesn’t mean that if your adjusted income is high enough, that you could end up with no Annual Allowance. The Government have set a limit on this taper, so that it can’t reduce your Annual Allowance to anything below £10,000.
And another allowance
Another change is that the Lifetime Allowance will be reduced. This is how much you can take out of your pension scheme without paying tax. And it doesn’t matter whether you receive this money in the form of a monthly income or whether you decide to withdraw a lump sum.
At the moment, the Lifetime Allowance is set at £1.25million. But from April of next year, it’ll be reduced to £1million. So you’ll only be able to withdraw up to £1million from your pension before having to pay tax. Most of us won’t be affected by this, but it’s something to think about if you’re still saving into your pension pot and think you might get close to this figure.
Something about a dividends tax?
You might have heard something about a the old dividend tax credit being abolished and a new tax on income received from share dividends. You might also be wondering whether this will affect your pension. Fortunately, it’s unlikely to. We’re not going to go into too much detail here (we’re not that mean), but the long and short of it is this:
- The way the dividend tax credit worked meant that you wouldn’t actually see an increase in the dividend income going into your pension pot;
- So, really, abolishing the credit won’t have any visible effect on the size of your pension;
- Any income from share dividends going into your pension won’t be taxed until you withdraw it (the £5,000 allowance that comes with this new tax applies to the pension provider, rather than the person receiving the pension).
- At that point, it’ll be taxed in the same way as any other withdrawal you make from your pension pot (this goes back to what we were saying about the Annual Allowance, above).
Oh, and the Government have also announced that they want to look into making it easier to transfer your pension between different schemes, with the possibility of capping penalties imposed due to exiting a pension scheme early for those over 55.
So there you have it. Those are the main changes – some will come into effect next year, and others are still in the consultation stage. Some won’t affect you, some will leave you feeling reassured, and others… not so much. But pensions are one of those things that affect a lot of us, from employees wondering who to work for to employers looking to recruit staff.
And if all that doesn’t have you running for the hills, then give yourself a pat on the back. You’ve earned it.