News updates

06 April 2016

Hot topic

Know your tax limits

The amount of tax relief available to higher earners changed on 6 April 2016, and the Lifetime Allowance also reduced.
You get tax relief on the contributions you pay to the RPS because they are deducted from your pay before income tax is paid.
 

The Annual Allowance

The Annual Allowance is the maximum you can save tax-free each year, across all of your pension arrangements. You will need to pay a tax charge if you exceed the Annual Allowance and do not have unused Annual Allowance from the previous three years that you can carry forward. 
 

How is the Annual Allowance changing?

For most people, the Annual Allowance is £40,000 but it will reduce if your ‘adjusted income’ is over £150,000. This is known as the ‘tapered Annual Allowance’.
 
Adjusted income, in this instance, is your taxable income plus your level of pension savings (called your pension input amount) during the tax year. 
 

Who is affected and how?

  • You may be affected if your taxable income is more than £110,000 (this includes income from non-employment sources). If your taxable income is £110,000 or less, you will not be affected by the tapered Annual Allowance.

  • If you have an adjusted income over £150,000 your Annual Allowance will reduce by £1 for every £2 of adjusted income over £150,000.

  • The maximum reduction to the Annual Allowance is £30,000, so if you have an adjusted income of £210,000 or more, you will have an Annual Allowance of £10,000.

 

Money Purchase Annual Allowance

If you use the new pension freedoms to access money from a defined contribution pension arrangement (such as the IWDC Section or Additional Voluntary Contribution arrangements such as BRASS and AVC Extra), you will have a lower Annual Allowance of £10,000 for any future savings you make in defined contribution arrangements. This limit is known as the ‘Money Purchase Annual Allowance’.
 
The Money Purchase Annual Allowance does not impact the amount of available of Annual Allowance for defined benefit savings.

 

Lifetime Allowance reduction

The Lifetime Allowance is the amount you can build up in all of your pension arrangements (excluding the State Pension) over your lifetime before you’ll be taxed.
 
From 6 April 2016, the Lifetime Allowance reduced from £1.25 million to £1 million.
 
When you take your benefits, they are measured against the Lifetime Allowance. Each £1 of annual pension is treated as having a value of £20. So, for example, the Lifetime Allowance is equivalent to an initial annual pension of £50,000 from the RPS.
 
If your savings already exceeded £1 million on 5 April 2016, there are two optional protections available to you, known as Fixed Protection 2016 and Individual Protection 2016.
 

More information

You can learn more about the Annual and Lifetime Allowances, and the optional protections, in our ‘Read as you need’ guides.

 

 

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