■ gross pension contributions paid under the relief at source method, less
■ any lump sum death benefit received which is subject to tax because the deceased died at age 75 or over.
The reasoning behind these new definitions is to remove the possibility of avoidance of the tapered annual allowance through the implementation of salary sacrifice (new applications of which after 8 July 2015 need to be included in the threshold calculation) but to also protect those individuals whose earnings are lower but which periodically could spike above the £150,000 figure. Individuals whose net income is below £110,000 will not normally be subject to the tapered annual allowance.
Salary sacrifice is where an individual elects to waive an element of taxable salary in lieu of the employer making a contribution to his pension. The advantage to this is that there are national insurance savings on both employer and employee payments.
The tapering has the effect that an individual who is subject to the money purchase annual allowance will have his personal annual allowance reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. The effect of the reduction can be seen in the chart here.
Contributions in excess of the individual’s limit, whether personal or employer, will be subject to an annual allowance charge.
Individuals who have drawn income benefits under the flexi-access arrangement and thus would be subject to a £10,000 annual allowance will further have any tapered allowance offset against any remaining annual allowance for any defined benefit contributions.
Carry forward of relief from previous years will still be operable but will be based upon the individuals’ unused tapered annual allowance meaning that unlike previously, the individual’s adjusted earnings will need to be recorded for the years from which any carry forward allowance is used.
As the taper of relief explained above applies to tax years it was necessary to introduce at the same time an alignment of all PIPs. A PIP is the period over which pension inputs (contributions or defined benefit accruals) are assessed for the purposes of the annual allowance. Previously, they usually ran for a 12-month period, although this could be longer or shorter. It was the end of the PIP in which the input within it was tested against the annual allowance.
This in itself could have been regarded as a means of simplifying what could be a complex calculation, had it not been for the need for transitional arrangements to cover those with PIPs which did not currently align with the tax year. To prevent individuals who had contributed in a PIP with an end date extending beyond 5 April 2016 being penalised for the newly introduced tapering allowance, it was necessary to bring those PIPs to an end, which was effected on 8 July. However, to prevent contributions in those PIPs counting towards the annual allowance in 2015/16, and which together with other inputs made resulting in an allowance charge, additional transitional allowances were offered. This has resulted in anomalies between those who had made contributions in a pension input period between 5 April 2015 and 8 July 2015 and those who did not.
