The introduction of the annual allowance taper has already started to impact on the certainty of the advice that clients are able to get from their advisers.
The problem with uncertainty is that it is tempting to do nothing for fear of doing the wrong thing.
But stopping pension contributions or opting out of a pension scheme where the employer is making substantial contributions is surely more risky than having to pay a tax charge on some of the contributions made.
Getting the right information, even in the simplest cases, where the annual allowance taper may apply is adding to the confusion, using things like pensionable salary is just not good enough when we are looking at a drop of £1 for each £2 increase in adjusted income.
Pensionable salary may or may not include additional payments that are taxable, such as a car allowance but the annual allowance taper looks at all taxable income.
Increasingly complex
Pensionable salary will also probably include net pay pension contributions and these shouldn’t be included in the threshold income calculation, this is just not straightforward at all.
Being able to extract the right information from what the client is able to provide may prove even trickier when they have more complicated earnings. Variable overtime, bonuses, dividends and interest paid on savings are not something that can easily be estimated early on in the year.
It will mean that it won’t be possible to determine what the annual allowance actually is within the tax year it relates to.
That isn’t even taking into account any issues with final salary schemes and the pension input amount, which again is unlikely to be a final figure until the end of the year.
Yes, in many cases you can get close to the figure but many people earning significant sums want to use all the allowances they are entitled to and they should be able to.
The only thing we can be certain of is that everyone has a £10,000 annual allowance.
Carry forward could be seen as the answer, using up what wasn’t used in the previous year once you have been able to ascertain the maximum. This does mean a delay in making contributions and the tax relief being claimed.
This is because it will be done a year later than should really be necessary and a clients’ investments being held for less time. Thankfully unless they have a sudden drop in income they should still be entitled to the tax relief at the same rate, although this can’t be guaranteed, so it is another risk the client will have to accept.
Paying in contributions that ultimately may have their initial tax relief removed may seem like a daft thing to do but some may choose to do this out of ease and use ‘scheme pays’ to pay the tax charge.
This is where the pension scheme pays on the member’s behalf, to use this it has to be at least £2,000. This would mean no delay in the contributions being made, tax relief being claimed or money invested. It should be noted that the annual allowance isn’t actually a limit on contributions, only tax relievable contributions.
Unexpected bills
Advisers have been put in an untenable situation with this kind of legislation, it forces them and their clients to rely on things that are yet to happen and making these types of assumptions may risk the client paying a tax bill that they weren’t expecting.
I understand why the legislation has been written in this way but I do feel it may have been deliberate to curtail pension contributions being made via the back door.
Claire Trott is head of pensions technical at Talbot and Muir
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