The 2015-16 tax year will be split into two mini tax years for the purposes of the annual allowance as part of transitional rules aligning pension input periods with the tax year, the government has announced.
In his Summer Budget today, the Chancellor announced that from 2016-17 onwards, the annual allowance for tax relieved pension savings would be reduced for those with incomes of over £150,000.
It will be cut by £1 for every £2 of income an individual has over £150,000 with a maximum reduction of £30,000.
To ensure the measure works as intended the government said it was necessary to align pension input periods with the tax year.
And it has published draft transitional rules to align pension input periods with the tax year by April 2016 and to protect any savings already made before Budget from retrospective tax charges.
As part of the changes, the 2015-16 tax year will be split into two mini tax years for the purpose of the annual allowance, the pre-alignment tax year and the post-alignment tax year - referred to as "mini tax years" in the guidance.
The government said this guidance was based on the draft legislation - and final updated guidance would be provided after the legislation receives Royal Assent.
Current pension input period rules
A pension input period is the period over which the amount of pension saving (pension input amount) under an arrangement is measured. The measurement works on the principle of how much was saved from the start of the pension input period to the end of the pension input period.
A pension input period for an arrangement under a registered pension scheme does not have to be exactly the same as the tax year.
A pension input period normally runs for a year, for example from 1 January to 31 December. A pension input period can be less than a year. The first pension input period for an arrangement cannot be longer than 12 months but a subsequent pension input period for that arrangement can be longer than 12 months.
An individual can have more than one pension input period, but cannot have more than one pension input period relating to the same arrangement ending in the same tax year.
Transitional rules for pension input periods
All pension input periods open on 8 July 2015 will end on 8 July 2015.
The next pension input period will be 9 July 2015 to 5 April 2016 for these arrangements.
This means that all existing arrangements on 8 July 2015 will have two or three pension input periods ending in tax year 2015-16, depending on the start date of the open pension input period.
For new arrangements that have their first pension input period starting on or after 9 July 2015 and on or before 5 April 2016, the pension input period will start on the normal commencement day (see PTM052100) and will end on 5 April 2016. 5
This means that some individuals may have put in pension savings of more than £40,000 prior to the Budget, on the expectation that these savings would be tested against the annual allowance for tax years 2015-16 and 2016-17 but which will now be only tested against the annual allowance for 2015-16. Transitional rules are therefore being introduced to ensure that in these circumstances pre-Budget savings of up to £80,000 are protected from an annual allowance charge.
Pension input period rules from 6 April 2016
Pension input periods will continue to exist from 6 April 2016, but they will be aligned with the tax year. We will consider at a later stage whether we can further simplify the rules by removing the concept of a pension input period altogether.
From 6 April 2016, all existing arrangements will have a 12 month pension input period from 6 April 2016 to 5 April 2017. All subsequent pension input periods will be for the period 6 April to 5 April. It will not be possible to vary this pension input period.
Any new arrangement that has a first pension input period commencing on or after 6 April 2015, will have a first pension input period that starts on the normal commencement day but which ends on 5 April in the same tax year as the pension input period started. All subsequent pension input periods will be for the period 6 April to 5 April. It will not be possible to vary this pension input period.
How the transitional rules will work
The government says the transitional rules are required to protect savers who have made savings prior to Budget on the assumption that their pension input period would not change.
As such the basic principles of the changes are that everyone will have a total annual allowance of £80,000 for 2015-16, plus any available carry forward.
Individuals will then have an allowance of up to £40,000 for post-Budget savings plus remaining carry forward from 2014-15, 2013-14 or 2012-13.
Ian has pension savings of £73,000 for pension input periods ending in 2015-16 of which £61,000 was made before 9 July 2015 and £12,000 after. Ian is not subject to the money purchase annual allowance. As Ian's total savings are less than £80,000 and his post-Budget savings are less than £40,000, Ian will not have an annual allowance charge for 2015-16.
As set out above, all pension input periods open on 8 July 2015 will end on that date with the next pension input period being 9 July 2015 to 5 April 2016.
Savings for pension input periods ending in 2015-16 will then be split into two mini tax years depending on whether the pension input period ends on or before Budget or is a post-Budget pension input period which will end on 5 April 2016.
Individuals will have an annual allowance of £80,000, plus any available carry forward, for all their pension savings in all pension input periods ending on or after 6 April 2015 and on or before 8 July 2015.
Savings from 9 July 2015 to 5 April 2016 will have a nil annual allowance, but up to £40,000 of any unused annual allowance from the period up to 8 July 2015 is added to this. If an individual had pension savings at some time in the period 9 July 2015 to 5 April 2016 but was not a member of a registered pension scheme at any time during the period 6 April 2015 to 8 July 2015 that individual will have an annual allowance of £40,000 for the period 9 July 2015 to 5 April 2016.
In addition any remaining carry forward from the 2012-13, 2013-14 and 2014-15 is added to this.
Ian has made pension savings of £61,000 for pension input periods ending from 6 April 2015 to 8 July 2015. This is tested against the annual allowance of £80,000 for that period. His savings are therefore £19,000 less than £80,000, and so Ian's annual allowance for post-Budget savings is the allowance of nil plus the £19,000 carry forward from pre-Budget plus any other of other carry forward that he has available.
The government paper also outlines income definitions as well as information around the money purchase annual allowance - as well as providing a number of other examples as to how the new rules will work in practice covering how to split the 2015-16 tax year and the annual allowance; carry forward; and paying any annual allowance charge for 2015-16.
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