With the Budget looming on 16 March ahead of the end of the tax year on 5 April, Craig Hendry, Managing Director of Johnston Carmichael Wealth, takes a look at some of the key issues to be aware of ahead of both dates.

Annual Allowance

The Annual Allowance is the limit placed on the amount of contributions that will benefit from tax relief during the tax year.

The Allowance for the 2015/16 tax year has become more complicated as the year was split into two periods by the rules announced in the July 2015 Summer Budget.

Before making further contributions, and especially if relying on Carry Forward to use previous years’ unused annual allowances, you will need to check the following:

• The breakdown of contributions paid between 5 April 2015 and 8 July 2015 and between 9 July 2015 and 5 April 2016. This includes both personal contributions and those paid by your employer.
• Confirm the Pension Input Periods for all pensions you have been contributing to in the current and previous tax years.
• Consider whether you will be affected by the Tapered Annual Allowance from 2016/17.
  • This applies to high earners with income over £150,000 and potentially to those with income over £110,000 depending on circumstances.
  • The income definition used is not just employment income but includes property income, interest and dividends on savings.
  • If the taper does apply then your Annual Allowance could be reduced to as little as £10,000 so, if affordable, you may wish to consider whether accelerating and bringing forward contributions to this tax year may be beneficial.
• If you have accessed pension funds under the new flexible pension rules check whether the £10,000 Money Purchase Annual Allowance applies to you before making any contributions in excess of this. The MPAA is designed to stop people recycling pension income drawn under the new rules in order to get a second bite at tax relief.  As the name suggests it affects contributions to money purchase pensions so does not affect contributions to a final salary scheme.

Lifetime Allowance (LTA)

The LTA limit restricts the value of tax relieved pension funds that a person can accrue during their lifetime.

• The LTA is set to fall from £1.25m to £1m on 6 April bringing an increasing number of people into its scope
• Consider the likely future value of your funds at your planned retirement date allowing for growth and future contributions to assess your risk of breaching the limit. Final Salary scheme benefits must be considered here as they are multiplied by a factor of 20 for LTA valuation purposes so seemingly small pensions can have a large value. For example, a pension of £12,000 per annum at retirement would have a value of £240,000 in the LTA calculation (£12,000 x 20).  Any lump sum paid in addition to the pension also needs to be added to work out the total LTA value of the fund.
• As with previous reductions to the LTA there will be transitional protection available in the form of Fixed or Individual Protection 2016. Fixed Protection will allow someone to protect their LTA at £1.25m and Individual Protection will protect their LTA at a value between £1.25m and £1m based on the value of their funds at 5 April 2016.  Individual Protection 2014 which offered protection at £1.5m can still be applied for if appropriate.
• Which form of LTA protection you should opt for if it is required can be a complicated decision. For example, Fixed Protection requires all pension contributions and accrual to cease from 5 April 2016 so if you think you will be affected by the reduction to LTA you may need to act quickly.

Pension Death Benefits

• In light of the new tax advantaged rules around pension death benefits, it is essential to review any expression or nomination of wishes or trust arrangements that are in place for your pension funds.
• Also, check with your pension providers what options they will be able offer your beneficiaries for accessing and using any pension funds left on your death. Not all providers and plans can facilitate all of the new options.  Generally, the older the plan, the fewer options there may be.

Third Party Contributions

• For those people with no earnings it is possible for £3,600 gross (£2,880 net of tax relief) to be paid into a pension which means that parents and grandparents can make contributions on behalf of their children and grandchildren.
• The payment can be made as a third party contribution directly into a pension plan for the child and as such is an income and inheritance tax efficient way of providing for the next generation.
• The funds will be unavailable until the child is in their late 50s but this lack of access together with the tax relief make this an attractive route for some. For smaller sums it also avoids the need for a trust arrangement to be put in place to manage access and retain control over the funds.

ISAs

• The ISA allowance for 2015/16 is £15,240. The allowance will remain the same in 2016/17.
• The Junior ISA allowance for 2015/16 and 2016/17 is £4,080.
• For any existing shares, consider Bed and ISA (selling an asset held outside an ISA and immediately buying it back in an ISA) to realise losses or gains within the annual capital gains tax exemption and shelter future income and gains from tax.
• The ISA status on funds can now be preserved on death with spouses and civil partners receiving a one off additional ISA allowance equivalent to the value of the deceased’s ISA at the time of their death.
• Remember, the ISA allowance is a ‘use-it-or-lose-it’ one!

If you have any questions about anything contained in this article, please get in touch with Craig Hendry onenquiries@jcwealth.co.uk or call 01463 796200.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.
Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.