Savers who make a contribution to their pensions even as soon as next spring could find that it counts towards their annual savings in the following tax year, meaning that they would be caught out by the cut in the tax-free allowance from £50,000 to £40,000 announced in the Chancellor’s Autumn Statement yesterday.
This means that people who want to boost their contributions in an attempt to beat the cut need to take note of their pension input periods, which all start at different times of the year.
For example, some people’s input periods run from the time they started to save, while others are set by their pension schemes and some have been adjusted by the savers themselves. However, as the tax year begins on 6 April every year that is the date on which the tax-free allowance will change for 2014/15.
So, if an individual’s fund has an input period starting in May, it will overlap the following tax year by a month, meaning that the pensions contributions in the year starting in May 2013 would count towards the lower £40,000 threshold in the 2014/2015 tax year.
It is estimated that around 100,000 people in the UK save £50,000 or more into pensions each year, however, Mr Osborne said that his changes will only hit one per cent of all Britons, as most pay far less than the £40,000 tax-free limit and the average is £6,000.
But many middle class earners or those who have only worked in one place all their career and secured final salary pensions will also be caught by the changes, while someone on a £55,000 annual pension could have to pay around £13,000 in new tax.
The Chancellor also cut the lifetime allowance for pension savings from £1.5m to £1.25m, although those who have already saved more than this can apply for protection from tax as long as they stop making contributions.
If you need advice surrounding your input periods or if you want to discuss your pensions further, then contact me and I’ll be happy to help.
Steve Horton is a Chartered Accountant and a Chartered Financial Planner who specialises in helping clients to manage their pensions and investments.