The reduction of the MPAA, at the time of writing this article, is still under consultation so is not yet legislation. However, the government appears keen to restrict future recycling of pension income after pensions have been flexibly accessed.

It would therefore be prudent in any tax planning exercise where MPAA applies (or will apply before the law changes) to fully use the contribution limit of £10,000 per tax year, before it reduces.

3) Last opportunity to apply for Individual Protection 14 

Individuals who had UK tax relieved pension savings of more than £1.25m on 5 April 2014 have until 5 April 2017 to register for individual protection.

Last chance to register 

• Must be done before 5 April 2017.
• Protection of lifetime allowance up to £1.5m.
• Total pension funds had to be valued at £1.25m or more as of 5 April 2014.
• Protects lifetime allowance to the lower of: the value of your pension(s) at 5 April 2014; £1.5m.
• Registration can be done online https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

4) Making excess withdrawals or surrendering an investment bond  

A chargeable gain can occur when an owner of an investment bond surrenders all or part of the policy or makes excessive withdrawals (over and above the annual 5 per cent). This could result in the owner facing a chargeable gain which gets added to taxable income.

A personal pension contribution can effectively extend the basic rate band by the amount of the gross contribution. So a contribution made in the same tax year when a chargeable event gain arises could prevent a top sliced gain from breaching the basic rate threshold.

Example

Example of tax on an investment bond with a chargeable gain. 

Bethany has taxable income (after deducting her personal allowance) of £40,000. Bethany also has an onshore investment bond which she has surrendered after holding it for 10 years with a chargeable gain of £20,000. What is the position ignoring top slicing relief and assuming no pension contributions are made?

• Taxable income = £60,000.
• On her earnings Bethany will pay tax on £32,000 @ 20 per cent + £8,000 @ 40 per cent = £9,600.
• The bond gain will sit entirely within the higher rate income tax band and because it’s onshore, basic rate income tax is deemed to have been paid. 
• The bond gain will therefore suffer additional tax of 20 per cent on £20,000 = £4,000.
• Total = £13,600

Now let’s assume Bethany pays a gross pension contribution of £10,000 which will effectively extend Bethany’s basic rate tax band from £32,000 to £42,000. 

Top slicing 

• The annualised gain  (over 10 years) = £20,000 /10 = £2,000.
• Taxable income plus gain = £42,000.
• As the basic rate band is extended by £10,000 the whole gain is now in the basic tax rate band.
• Bethany’s new liability = £8,000 (tax @ 20 per cent on £40,000 income and no additional tax on the £2,000 gain.
• An overall tax saving of £5,600.

5) Restoring the Personal Allowance and avoid losing Child Benefit 

The personal allowance for tax year 2016/17 is £11,000 but for high earners the personal allowance is reduced by £1 for every £2 on net income over £100,000.

Child benefit is also reduced for earnings over £50,000 and lost completely for earnings over £60,000, and 1 per cent of the benefit has to be repaid for every £100 earned over £50,000.

It is important therefore to remember that where individual’s earnings / taxable income is close to HMRC limits (where allowances or benefits are reduced), making pension contributions can reduce taxable income/earnings and restore allowances.

Nigel Orange is technical support manager for Canada Life