The real shocker though, is that this removes all ability to carry forward.
This could prove to be disastrous for those over 55 who have not ceased work, but needed a bridging sum or income from their pensions to maintain their standard of living and think that they can restore their pension savings in the following years.
Contribution is key
“Perhaps the most complicated aspect of the annual allowance and carry forward is the determination of the deemed pension contribution within defined benefit pensions.
Anyone with local government pensions, NHS pensions etc. may be forgiven for assuming it is the amount they physically contribute that determines how much they have paid in.
However, it is in fact the deemed increase in the value of benefits over the course of the scheme year that will be tested against the individual’s annual allowance.
The situation is further complicated for those high earners who could be affected by the tapered annual allowance.
In this instance, not only do they have to calculate the annual allowance input but, they then need to deduct their own personal contributions into the scheme to establish the deemed cost of the employer contribution.
This deemed employer contribution will then be added to their other income for the ‘adjusted income’ test.
I would encourage members of defined benefit schemes who receive remuneration in excess of £100,000 or, those members who might receive an incremental award or large increase in salary, to seek specialist advice on this matter. Again, individuals could be incurring tax charges without even knowing.
But what is the tax charge?
Should an individual ever breach their annual allowance, or cumulative carry forward (if available), they will be liable to pay a tax charge on the excess amount.
This excess will be added to the individuals’ other income for that tax year effectively as a top slice, with a tax charge of up to 45 per cent of the excess potentially payable.
From my experience this could be many tens of thousands of pounds. Remember, many of these individuals will be receiving dividends as their highest slice of income, which is often taxed at a lower rate than typical PAYE income.
Ordinarily therefore, dividends as the higher slice tends to be more tax beneficial. With the annual allowance charge however, roles are effectively reversed, with dividends occupying the lower tax thresholds and the heavier income tax-equivalent annual allowance charge sitting on top.
Effectively, therefore, the tax charge could end up more than what they would have been charged in income tax if they had received it as income in the first place.
