PIP Changes - an Opportunity

by Melissa Hall on 01·12·2015

Introduced in April 2006, these only became more relevant when the annual allowance was reduced to £50,000 in April 2011 and then only for individuals looking to make significant pension contributions.

Up until recently, it was possible to manipulate and change the end date of the Pension Input Period (PIP).  In the most recent Budget, the Chancellor announced that all PIPs will be aligned from the 06 April to 05 April with effect from 06 April 2016.

Because PIPs will be ending at dates throughout the time up to 06 April 2016, transitional rules were put in place. All PIPs open on 08 July 2015 were ended on that date (pre-alignment tax year). The next PIP for all individuals is 09 July 2015 to 05 April 2016 (post-alignment tax year). In effect, this tax year has been split into two mini tax years.

What this means is that each individual has a total annual allowance of £80,000 for PIPs ending in the tax year 2015/2016.   The increased allowance has only been given as part of the transitional rules and is to protect savings made prior to the Budget from any retrospective tax charges.  This is in addition to any available carry forward from the three previous tax years.

How is the increased annual allowance treated?

The £80,000 annual allowance is allocated to the pre-alignment tax year with the post-alignment tax year having no annual allowance.

Up to £40,000 of any unused allowance from the pre-alignment tax year can be used for pension contributions made in the post-alignment tax year. In addition to this, of course, there is also the facility to utilise unused annual allowance from previous tax years.

Example 1 - Tax Year Aligned PIP

Paul's pension plan has a PIP running with tax years.  He made a pension contribution of £20,000 on 1 May 2015 and wants to know the maximum contribution he can now make prior to 6 April 2016 assuming that he has no carry forward available from previous tax years.

The annual allowance for the PIP running from 6 April 2015 to 8 July 2015 (the pre-alignment tax year) is £80,000, however the maximum that he can carry forward to the PIP running 9 July 2015 to 5 April 2016 (the post-alignment tax year) is £40,000.

The maximum pension contribution he can make prior to 6 April 2016 is therefore £40,000, giving a total contribution in the 2015/16 tax year of £60,000.

Example 2 - Mid-Year Aligned PIP

Sally's PIP runs from 01 June to 31 May and she paid a contribution of £40,000 on 01 May 2015 and then a further contribution of £20,000 on 30 June 2015 (as the 2015/16 PIP had started).    When the PIP was ended on 08 July 2015, contributions for the pre-alignment tax year were £60,000 in total.  There is no annual allowance charge as the total allowance is £80,000.

The maximum pension contribution she can make prior to 6 April 2016 is therefore £20,000 (not taking any unused allowance from previous tax years into account) is £20,000, giving a total contribution in the 2015/16 tax year of £60,000.

The transitional rules give rise for an opportunity for some individuals, particularly high earners who like to maximise pension contributions and business owners who are perhaps looking to reduce their liability to corporation tax.  If no more than £40,000 was saved into a pension arrangement in the pre-alignment tax year, then they have scope to save up to a further £40,000 for the post-alignment tax year.  If, of course, higher than £40,000 was saved, they may have some scope but this will be less than £40,000.

This is a use or lose it opportunity as the carry forward amount for the 2015/16 year from 06 April 2016, will be the standard annual allowance of £40,000, not the higher £80,000 allowance that currently applies.

This "higher allowance for 2015/16" could be useful for higher earners who will be affected by the tapered annual allowance from 06 April 2016 and are looking to maximise retirement savings before this time.  From this date, individuals with adjusted income of £150,000 in a tax year will have their annual allowance reduced by £1 for every £2 of income over £150,000.  The maximum reduction to the annual allowance will be £30,000.  For example, individuals with adjusted income of £210,000, will have just £10,000 of annual allowance for pension contributions.