PIP-PIP! double allowance for some in 2015/16

Tue 14 Jul 2015

New rules are being introduced to align pension input periods (PIPs) with the tax year by April 2016. The transitional rules to enable this effectively mean that 2015/16 is being split into two, potentially allowing high earners an additional opportunity to augment their pension funding now. 

The first new PIP will be from 9 July 2015 – 5 April 2016.  There will be a maximum total annual allowance for the tax year 2015/16 of £80,000, but only £40,000 can be used against pension contributions in the period 9 July 2015 – 5 April 2016.  The reason the annual allowance is being increased in 2015/16 is to recognise the fact that some individuals may have already saved more than £40,000 before Budget day, expecting to fall within their annual allowances given how this was tested. 

For example, if a PIP ended on 31 May, contributions in the year ended 31 May 2015 would normally have been tested against the annual allowance for 2015/16, but contributions in the period 1 June 2015-  8 July 2015 would normally have fallen into a PIP ending on 31 May 2016, so would have been tested against the annual allowance for 2016/17.   The maximum possible relief for 2015/16 of £80,000 (ignoring any unused relief brought forward) , will only be achieved where someone has already saved £40,000 into their pension in the period 6 April 2015-8 July 2015.  Nevertheless, everyone now has an additional £40,000 annual allowance for the remainder of this tax year, on top of pension savings already made in the pre-Budget part of the tax year. 

It is therefore especially worth high earners making the most of this extra headroom before the shutters come down in April 2016.(There are similar transitional rules in respect of the £10,000 money purchase annual allowance which applies where someone has flexibly accessed their pension. In this case there will be an increased allowance of £20,000 for 2015/16, but only £10,000 of this can relate to the post Budget element of this tax year.)

The Green Paper asks for views on the state of pension tax relief and states it is open to all views rather than putting forward a specific proposal. It has identified 8 key areas it is looking for responses to. These focus on the best way to incentivise pension saving and how simple, transparent and sustainable the current arrangements are. It’s hard not to come to the conclusion that the Government wants pensions to become more like ISAs, but with Government top ups as an added bonus.

For further information see the Technical Note ‘Pensions: Transitional provisions for aligning pension input periods’.