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How to avoid the annual allowance speed trap

Karena Woodall, consultant, Mattioli Woods, looks at instances where clients can be inadvertently caught out on their pension accumulation journey

Back in July it was reported that a British tourist on holiday in Dubai rented a £270,000 Lamborghini Huracan for two days, leaving his passport as security.

He then proceeded – in the early hours of the morning- to break the speed limit on one of the city’s busiest roads, the Sheikh Zayed Road, triggering every speed radar.

In fact, he was clocked breaking the speed limit no fewer than 33 times in less than four hours. The top speed was 150mph and it ultimately resulted in total fines of 175,000 dirhams (circa £36,000).

The location of the ‘act’ is important as tourists can leave the UAE even after accruing traffic fines because they are issued in the name of the owner.

Getting landed with a bill for something you did not do – and then being responsible for reporting and sorting out payment and, if the matter is not resolved, being subject to additional fines – seems unfair, doesn’t it?

But individuals subject to the annual allowance can find that employer contributions to pensions place them in a position where charges can apply.

Speed humps in the pension road

The announcement that the annual allowance was to reduce from £255,000 to £50,000 from April 2011 signalled the end of speeding up contributions into pensions. The further reduction to £40,000 in April 2014 was another speed hump on the pensions highway.

Introducing the money purchase annual allowance in 2015 (and the subsequent 2017 reduction) put those in flexi access on the hard shoulder, and the changes from April 2016 put roadworks in some high-earner pension planning, ultimately leading to diversions – via other routes – into retirement.

Tapering speed

From 6 April 2016, the annual allowance may be tapered for individuals with adjusted annual incomes over £150,000 in a tax year.

Generally speaking, an individual’s ‘adjusted income’ will be their total taxable income, including any pension contributions. The annual allowance applies across all pension schemes an individual may belong to and, if they exceed their annual allowance in a tax year, they may be levied with an annual allowance charge

It is the individual’s responsibility to check whether they are affected by the annual allowance, but there are certain road signs that could be utilised to assist an employer in identifying pension members who are possibly affected.

Employees and employers should be aware of how adjusted income can be quickly accelerated by the payment of bonus/commission, especially if paid towards the end of the tax year as this may leave little time to adjust pension contributions to within the restricted annual allowance.

Super (car) planning does not always help as salary and bonus sacrifice arrangements set up after July 2015 will be caught in the adjusted income trap so cannot be used to avoid the tapering.

Some affected individuals may be able to initially minimise the impact of the tapering by carrying forward any unused annual allowances from previous years. But what if there is no carry forward available? Or individuals are subject to the money purchase annual allowance (MPAA) and can’t use carry forward?

Speed tickets

Whilst any personal contribution over the maximum will result in annual allowance charges that nullify the tax relief given, the employer will still get corporation tax relief on the contribution they pay, albeit the pension member is the one liable for the annual allowance charge.

This ticketing may come as a shock to employees and it is vital that both employer and employee are up to speed on the benefits and consequences of exceeding the limits.

A restructure of benefits can create an easement and a review of the options can assist both individuals and employers in making an informed decision on the highs and lows of such actions. However, employers need to be mindful of both emotive and legal considerations to ensure that the solution to the problem does not create additional ‘breaking the law’ scenarios.

Allowance exceeded – what now?

The annual allowance charge is declared on an individual’s tax return and was reported for the first time for the 2016/2017 tax year. It resulted in a rush for January 2018 tax returns to be completed, with individuals racing to get their figures submitted in time.

The Pension Savings Statement (PSS) is a statement issued by the pension provider confirming contributions paid in the previous tax year and contributions paid in the previous three tax years or pension input period.

The issue of the PSS should be viewed as an opportunity to check whether an individual is within annual allowance limits. Not everyone gets one, though, as the PSS is scheme-specific and only sent when contributions paid in the tax year to that specific scheme are in excess of the annual allowance, or where the scheme provider believes that the individual is subject to the MPAA and contributions have exceeded £40,000.

For the 2017/18 tax year, PSS will be issued by 6 October 2018, and individuals also have the option to request a PSS if not automatically provided.

If the ‘charge’ is high enough there may be a way of it being passed to the pension scheme or even delayed.

There is an option for the scheme to pay the tax charges. However, there is only a right to use the ‘scheme pays’ system if the tax charge can justify it. Mandatory ‘scheme pays’ is only available if the tax charge is at least £2,000, based on a test against the standard annual allowance of £40,000.

Schemes can still pay the charge, but it does depend on the scheme. Finally, and importantly, whether it’s a mandatory or an optional ‘scheme pays’ will dictate the date the charge has to be paid by.

So, let’s make sure in January 2019 there is no speeding to the tax return deadline and that by looking at all options – including ‘scheme pays’ – potholes in the road don’t take clients by surprise.

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