Pension savers may miss out on thousands of pounds in tax relief due to confusion around the annual allowance taper rules implemented earlier this month, according to experts.
A tax relief cut for high earners, in the form of the annual tapered allowance, was announced in the summer Budget 2015 and came into force on April 6 this year despite consternation from the industry around what is seen as an overly complicated system.
People currently benefit from tax relief on an annual allowance of £40,000 but individuals with adjusted income of more than £150,000 have had their annual allowance reduced by £1 for every £2 of excess income. People with adjusted income of £210,000 or more will have their annual allowance tapered to the minimum of £10,000, according to the new rules.
To make matters more complicated, individuals including additional rate taxpayers affected by the taper can carry forward unused allowance from the previous three years.
An individual earning £210,000 or more making a personal net contribution of £8,000 in 2016/17 will benefit from £2,000 basic-rate tax relief giving a gross payment into their pension of £10,000, plus further £2,500 in tax relief via self-assessment as their top rate of income tax is 45%.
Alliance trust savings pensions propositions manager Brian Davidson said: “With all this radical change to pensions over the last few years, savers could easily miss out on tax relief in the new tax year.
“Unclaimed tax relief can be as high as £58,500 which would make a substantial difference to anyone’s retirement. When people realise that they are affected by the tapered annual allowance they could be forgiven for assuming that the carry forward rules will not apply which could be a costly error.”
Informed Choice managing director Martin Bamford said: “It’s still early days regarding the pensions taper, we had a couple of clients that were caught out by it, they exceeded the threshold by £4,000 each.
“Things get tricky between £110,000 and £180,000 but the regime is manageable if you have a full picture of a client’s earnings and contributions. Getting this is more important than ever.”
Treowe Wealth Advisers managing director Nick Round said that it is an adviser’s job to get used to complicated tax systems like that around pensions.
“Nothing that comes out is as straightforward as it sounds initially. Advisers need to be cautious and clear that their advice is appropriate, and approaching this tax regime in a methodical way is just a part of their job.”
Other areas of confusion for pensions savers include the Money Purchase Annual Allowance which can cap an individual’s ability to make tax efficient contributions to their SIPP. The Money Purchase Annual Allowance may be triggered depending on how an income is taken from a pension.
The lifetime allowance reduced this month from £1.25m to £1m and is another element that pension savers much consider.
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