An overview of how Pension Input Periods are being aligned to tax years and the effect on existing pension savings for 2015/16

For financial adviser use only

In his 8th July 2015 Budget Speech the Chancellor announced new rules so that Pension Input Periods will in future be aligned with tax years from the 2016/17 tax year. For the vast majority of people this will make it far easier to know how much they can pay towards their pension savings.

To make the transition from the old to new rules the 2015-16 tax year is effectively being split into two ‘‘mini tax years’’, either side of the Budget. The first period is known as the ‘‘pre-alignment tax year’’ (which could have either one or two Pension Input Periods that ended in the period 6th April 2015 to 8th July 2015) and the other is the ‘‘post-alignment tax year’’ (running 9th July 2015 to 5th April 2016).

• All existing Pension Input Periods were closed on the evening of 8th July 2015.
• On 9th July 2015 a new Pension Input Period starts, and ends on 5th April 2016.
• This means that everyone has either two or possibly even three Pension Input Periods this tax year, and will have one per year from 6th April 2016.
• As part of the transition, instead of the normal £40,000 Annual Allowance, this will be increased to £80,000 for the period 6th April 2015 to 8th July 2015; up to £40,000 of this, if not already fully used by Budget day, can be carried over to the post-alignment tax year running from 9th July 2015 to 5th April 2016.

Due to the re-setting of Pension Input Periods, the small proportion of individuals who were using some or all of next year’s £40,000 annual allowance in the current tax year, will find that they have actually now been using this year’s transitional £80,000 annual allowance, and may need to revisit their calculations.

For some, particularly those using Carry Forward, it is possible that an unexpected consequence is that there is an extra year’s worth of Carry Forward available (since the rules dictate that you always maximise the current year first, and then go back three previous tax years; some individuals who thought they were using the 2016/17 annual allowance may now have been using the increased 2015/16 allowance instead, bringing into play the 2012/13 tax year for Carry Forward).

Note that whilst our Minerva SIPP scheme has a default Pension Input Period ending 5th April, a small number of individuals have elected to have non-standard Pension Input Periods.

Example 1 Existing pension savings plan with regular contributions, PIP already aligned to the tax year

Even in cases where the PIP is already aligned to the tax year, the new transitional rules still apply, meaning that there could be the ability to pay higher contributions in the 2015/16 tax year than was originally expected.

Take an example where a client has been paying a regular contribution of £2,500 paid on 10th of each month; this means there would have been 3 payments totalling £7,500 in the period 6th April 2015 to 8th July 2015 (the pre-alignment tax year). This is well within the £80,000 transitional annual allowance, and up to £40,000 of this can be carried over to the post-alignment tax year (9th July 2015 to 5th April 2016).

Where the client had previously expected to make a top up payment later in the year to maximise funding (of £40,000 minus 12 x £2,500 = £10,000) this now means that regular contributions can continue at £2,500 with a bigger top up near the end of the tax year (of £40,000 minus 9 x £2,500 = £18,500).

Example 2 New pension savings plan set up in May, £40,000 already paid for the 2015/16 tax year.

Prior to the Budget announcements, this meant that the full Annual Allowance of £40,000 had been used, assuming the Pension Input Period was already aligned to the tax year (i.e. the PIP end date was 5th April 2016). However, as all Pension Input Periods closed on 8th July 2015 there is now a second PIP running from 9th July 2015 to 5th April 2016.

Due to the Budget, the available annual allowance is now what remains of the £80,000 pre alignment annual allowance, up to a maximum of £40,000. As £40,000 of this had been used, there is now the maximum £40,000 remaining.

This means that another £40,000 contribution is possible for the 2015/16 tax year, giving a total payment of £80,000 without having to use carry forward.

Example 3 Existing pension savings plan, PIP not aligned to tax year, 2015/16 annual allowance already used, some of 2016/17 already used

Here we look at an example of an existing scheme with a PIP that runs 1st June to 31st May. For the PIP that ran 1st June 2014 to 31st May 2015 the customer had used the full £40,000 for the 2015/16 tax year.

The next PIP would have run from 1st June 2015 to 31st May 2016 and would have related to the 2016/17 tax year.

We’ll assume a £10,000 single contribution has been paid between 1st May 2015 and 8th July 2015 as a result of the Budget, the PIP that started on 1st June 2015 was closed on 8th July 2015 and a new PIP started from 9th July 2015, running until 5th April 2016. There are two PIPs relating to the first part of the year and the total contributions in these are £50,000.

The annual allowance for the first part of the tax year is £80,000, so the £50,000 contributions are fine and leave £30,000 allowance remaining. The available allowance for the second part of the year is the remainder from the first part up to a maximum of £40,000. In this case the remainder is £10,000 leaving scope for a further contribution of £30,000 in before the end of the tax year.

Example 4 Existing plan, PIP not aligned to tax year, annual allowances of both 2015/16 and 2016/17 already used

Here we take the example where an individual maximum funded their pension contributions at the start of the 2015/16 tax year.

In this example, there is no Carry Forward available, and so an employer contribution of £80,000 was made, split over two PIPs. The first payment of £40,000 was made on 15th May 2015. The input period was then closed on the 30th May 2015, rather than letting it run to 5th April 2016.

The new input period started on 31st May 2015 and another £40,000 contribution was paid.

This new PIP would normally have run until 30th May 2016, ending in the 2016/17 tax year. However, thanks to the Budget, the second input period now ended on 8th July 2015.

Prior to the Budget, the PIPs were:

After the Budget, they are now:

The annual allowance for the first part of the year, to which PIPs 1 and 2 relate to is £80,000.

As all of the transitional Annual Allowance has been fully utilised there is no scope to support any contributions in PIP 3, from 9th July 2015 to 5th April 2016.

Important Notes: This information is aimed at professional financial advisers and should not be given to or relied upon by private investors. All content is based on our understanding of current and proposed legislation, which may change in future. Note that InvestAcc Pension Administration Limited does not provide financial advice. Errors and Omissions Excepted. 7th September 2015