Techzone

Some of your higher earning clients may be facing a tax charge on their pension funding as a result of the tapered annual allowance. Furthermore, many may be unaware of this, as pension providers only have to inform those who paid in more than the full £40,000 annual allowance to their scheme. And failing to include this in their self-assessment (or failing to notify if not registered for self-assessment) could mean further penalties and interest.

Only after the tax year has ended may the full picture become clear. So with the 2018/19 tax year over, now is the perfect time to:

1. Assess what happened in 2018/19: finalising the figures as to what was saved, what was earned, whether there's an outstanding tax charge, and how that will be paid
2. Plan for 2019/20: the sooner figures for 2018/19 are known, the easier it will be to plan for the current tax year. Income levels can be forecast and the amount of annual allowance available, including any unused allowance carried forward, can be gauged.

Identifying which clients could be caught

Assessing a client's income can be a problem during a tax year, especially for the self-employed who may not know their income until after the end of a tax year. But broadly, anyone with 'adjusted income' (total income plus any employer pension contributions) in excess of £150,000 could face a reduced annual allowance.

Since April 2016, high earning individuals have been grappling with the tapered annual allowance, which reduces the amount of tax relieved contributions that can be saved into a pension.

Many clients may be unaware that they have breached their annual allowance and that they may have tax to pay.

How the tapering works

Tapering reduces the £40,000 annual allowance by £1 for every £2 of 'adjusted income' your client has over £150,000. So the more they earn, the less they can put into a pension with tax relief. The lowest the allowance will go down to is £10,000 for anyone with 'adjusted income' of £210,000 or more.

While it won't be possible to change this for 2018/19, it may be possible for some of your clients to reinstate their full £40,000 allowance in 2019/20 by making use of carry forward. The tapering of the annual allowance won't normally apply if 'threshold income' (total income less personal contributions) is £110,000 or less. So a large personal contribution using unused allowance from the previous 3 tax years can bring income below £110,000 and restore the full £40,000 allowance. And some of it may attract 60% tax relief too.

What is adjusted income and what is threshold income?

It's important to understand what counts as 'adjusted income' and what counts as 'threshold income'. Both start from the same basis of total income from all sources including savings and dividends. But it's the adjustments for pension funding where the differences lie.

• Adjusted income is broadly total income plus any employer pension funding. This relatively easy to identify for money purchase schemes but less so for defined benefits. For DB, the employer contribution is valued as the total pension input amount less any employee contribution.
• Threshold income only includes an addition for employer contributions where they're part of new salary sacrifice arrangements made after 8 July 2015. Any personal contributions are a deduction from total income.

Paying the charge

If any excess can't be cleared by carry forward then an annual allowance tax charge will be due. The excess is added to the individual's 'net reduced earnings' (broadly their earnings less the value of gross personal contributions to a pension) and taxed at their marginal rates.

This charge has to be paid by the self-assessment deadline - for 2018/19, by 31 January 2020 if completing online. The member can pay the charge themselves, or it may be possible to get the pension scheme to pay it direct from the member's fund/accrued benefits, but this figure will need to be agreed with the scheme before this date.

Scheme pays

The scheme doesn't have to offer this facility unless the charge is more than £2,000, they've received more than the normal £40,000 in the tax year, and the client elects for it to be paid this way. And even then, their liability is only for the amount above £40,000, not for any amount between a tapered allowance and £40,000. In this situation, the deadlines for notification and payment are extended beyond 31 January, though the charge still needs to be recorded on the self-assessment return.

Some schemes may agree to pay a charge outside of these criteria, so it's important to ask them and find out about their deadlines for receiving notification from the member.

If the scheme agrees to this voluntary payment, the timescales are quite short. The liability for the charge is still with the member and the tax is due by 31 January 2020 (for a liability in the 2018/19 tax year).

The scheme may need a lot of notice to be able to get this deducted and paid across in line with their normal accounting procedures. So for 2018/19, a notification deadline of 31 August 2019 would not be unusual - a lot closer than the 31 July 2020 deadline for regular scheme pays.

With these shortened timescales, the individual and their adviser need to be well prepared:

• income levels need to be known for threshold and adjusted income;
• a reduced annual allowance needs to be calculated;
• potential carry forward should be examined; and
• the possibility of getting the scheme to pay any charge should be confirmed, and their notification deadlines identified.

If the tax is not paid by 31 January 2020, late payment penalties and interest may be accrued, even though the tax return was submitted on time.

Going forward

To assist planning for the current year, estimates of earnings and contributions may be known, giving an idea of what the annual allowance could be tapered to. This can give a heads up as to the scope for further contributions, potential carry forward, or even limiting contributions to fit within the reduced allowance.