THE TAPERED ANNUAL ALLOWANCE

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Scottish Widows logo (a hooded woman) - with caption 'Masterclass, Tapered Annual Allowance'.

In this recorded webinar from February 2016, we’ll share our technical guidance on the Tapered Annual Allowance looking at the following;

  • an overview of the Tapered Annual Allowance
  • calculation of adjusted and threshold income
  • Carry Forward rules after 6 April 2016
  • employer considerations
  • examples/case studies.
  • Operator: Good day and welcome to the TechTalk MasterClass – Get the Latest Insight on the Tapered Annual Allowance: A Summary for Advisors. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr Simon Harris. Please go ahead sir.

    Simon Harris: Thank you Eva. Good morning and welcome to the latest in the pension MasterClass series, supported by the Scottish Widows Financial Planning Team. Whilst this morning the focus will be on the Tapered Annual Allowance, a measure to be introduced from 6th April this year restricting the amount of Annual Allowance available to high earners, this comes against the backdrop of other changes to pension limits and potentially changes to tax relief in next month’s budget. The introduction of the Tapered Annual Allowance will impact on your most valuable high earning clients who have significant pension contribution levels or pension accrual sponsored by their employer, themselves or indeed both. If you've not contacted these clients already these individuals need to be made aware of the changes coming if they are to avoid the potential for any annual allowance tax charge by breaching the limits and if they should exceed the annual allowance what they can do about it using facilities such as Carry Forward. Maximising contributions using Carry Forward remember it’s the last opportunity to use the unused Annual Allowance from 2012/2013. Other key pension change is the reduction to the Lifetime Allowance, whilst not specifically covered today it’s important to mention to those individuals who could be funding towards the current Lifetime Allowance limit before this changes in April or those who could simply be looking to maximise their pension funding in this financial year. It may be prudent to act now in the event that changes are made ahead of the tax year end in the budget. Whilst any announcement the Chancellor makes in the budget regarding tax relief may not mean any changes impact immediately, you only have to think back to 2010/’11 and the then plans to implement a tapering restriction of tax relief for high earners. Whilst ultimately at the time this plan was cancelled in favour of a reduction to the Annual Allowance and Lifetime Allowance, funnily enough by the current Chancellor, you may also remember that anti-forestalling measures were introduced ahead of these proposed changes to restrict tax relief available to high earners immediately. Could we see similar this time?

    But back to this morning and our main focus for Tapered Annual Allowance, I'm delighted that this morning’s session will be presented by Tom Coughlan and Chris Jones, both managers within the Scottish Widows financial planning team, both with many years’ experience in the pensions world and I'm sure you're more than familiar with their work through articles that regularly appear in TechTalk, including the tax year end special edition currently available. The presentation is due to last for up to 30 minutes following which there’ll be time for any questions you may have. Sandra Hogg will also be highlighting additional resources Scottish Widows has available to support you through this period including a Carry Forward calculator and various articles created by the team. A recording of today’s presentation will be made available should you wish to review the content and CPD certificates will also be available.

    I would like to now hand over to Tom Coughlan to start today’s presentation.

    Tom Coughlan: Thank you Simon. Good morning everyone. The Tapered Annual Allowance is the subject at the moment that is generating the most questions to our help desk and hence we've decided to dedicate a whole session to it. The rules are very complicated and most misunderstandings at the moment arise on the definitions of income. So as I say we're going to look at an introduction to the changes. Then we're going to spend a little bit of time looking at the two definitions of income, adjusted income and threshold income. We'll go through some examples just to explain how those two definitions operate and then there’s some other areas that we'll look at as well. We'll look at the interaction with the lifetime allowance and also how the Carry Forward rules will be incorporated into the tapered annual allowance rules. And then we'll look at some other issues for employers and those operating automatic enrolment schemes.

    I will start with the rules generally. So the restrictions come in on the 6th April 2016 and will affect high income individuals. Obviously between now and then we have a budget and there is an expected announcement on pensions tax reform which may change the Tapered Annual Allowance rules but at the moment we're assuming they’re going ahead as planned. The key income limit is £150,000. If income and employer pension contributions are above this limit then the Annual Allowance will be reduced. The reduction is on a 2 for 1 basis, so every £2 of excess income will result in a £1 reduction in the Annual Allowance. The Annual Allowance will not be reduced below £10,000 and that will be reached at £210,000 of income. So I've already mentioned the adjusted income definition of £150,000 but we also have the threshold income definition which is £110,000 and both income levels have to be above these two thresholds for the Annual Allowance to be reduced. We've been asked to comment on quite a lot of fairly elaborate ways of getting round these rules, but there’s very limited scope to avoid the tapered annual allowance. If your adjusted income is above the relevant level, then your Annual Allowance will be reduced and there isn’t a huge amount that can be done about it.

    Adjusted income is the key income definition for the Tapered Annual Allowance. The definition itself starts with net income for the tax year. Net income in this context doesn’t mean your post tax earnings or your take home pay - it simply means your taxable income once it has been adjusted for certain deductions such as trading losses and deductible interest payments. To this a number of things have to be added. We have to add in any personal contributions paid to certain types of pension schemes, so older style personal pension contracts known as 226s, also any personal contributions paid to occupational schemes that operate on the net pay basis. The reason we add these back in is because they were deducted in calculating your taxable income. This is just a way of returning your taxable income to the level that it would have been had you not paid any personal contributions to a pension scheme.

    Perhaps most importantly, employer pension contributions are also added back in to the adjusted income definition. Some points to note about that list: this is a simplified version of the actual definition, the full definition includes a few other things that affect non-domiciles and those who are in receipt of pension death benefits but for the majority of clients those won’t apply and it will be just the things on the list that I mentioned but obviously you will need to be aware of the other things for those clients that are affected. When we say income then we mean earned income and non-earned income, it’s not just your salary, it is other things like dividends, bank interest, rental income etcetera and as I said adding back in those personal contributions to certain types of pensions is just a way of returning your income back to the level it would have been if you hadn’t have paid any pension contributions and the reason for this is just to ensure fairness between members of different types of pension schemes: to be sure that those who pay to personal pensions aren’t treated any differently to those who pay to occupational schemes.

    In terms of employer pension contributions, it’s fairly straightforward for defined contribution schemes, you just add back in the monetary amount. For DB schemes it’s a little more complicated because you have an accrual figure, from that you have to deduct the employee contribution and what’s left will be the employer contribution. A quick example just to show how that works, so we have Alan who is aged 50, he receives a salary of 160,000 in 2016/2017, he’s a member of his employer’s occupational pension scheme and pays 5% of salary £8,000 into that scheme and he also receives a 10% employer contribution of £16,000. His contributions will be paid via net pay because it’s an occupational scheme which just means that the contribution is deducted from his salary before income tax is applied. So his net income in this case will be £152,000, it won’t be £160,000 it will be his income once you've deducted the £8,000 he pays to the occupational scheme. So to that we have to add the £8,000 net pay contributions. This goes back to what I was saying earlier about the definition just returning the income level to what it would have been if he hadn’t paid any personal contributions to that scheme. To that we have to add the £16,000 employer contribution as well. In total that gives adjusted income in this instance of £176,000.

    Now we'll move on to threshold income. Again the starting point is the same; we start with the client’s net income for the year or taxable income, but we're not adding any personal contributions, instead what we're doing is deducting those personal contributions which were paid to schemes that operate relief at source such as personal pensions, stakeholders, etcetera. The only pension contributions we have to add are those that arise from a new salary sacrifice agreement: a salary sacrifice agreement that was entered into after the budget on the 8th July last year. Again just some points to note; it is a simplified list so there are other things included in the full definition which we need to be aware of, but for the majority of clients it will be those mentioned above. Even for this income definition earned and non-earned income are included. Similarly to the previous definition deducting those personal contributions is just to ensure fairness between the members of different types of pension schemes, so if you're paying via net pay under an occupational scheme your taxable income will be reduced already by virtue of you paying that contribution whereas if you're paying to a personal pension it won’t be so we have to deduct the personal contribution just to ensure the outcome is the same for those different types of pension schemes. Salary sacrifice only impacts on threshold income, it has no impact on adjusted income and we'll get onto that in a few moments.

    We'll continue the example of Allen and calculate the threshold income. As we said the salary is £160,000 but that isn’t the starting point. The starting point will be his net income or taxable income of £152,000. There are no personal pension contributions to deduct and there’s no salary sacrifice so his threshold income will be £152,000 which is obviously much higher than the threshold of £110,000.

    Now to summarise those two income definitions in brief. Adjusted income is taxable income and to that we must add employer pension contributions and personal contributions that have reduced your taxable income: net pay contributions and 226 contributions. Threshold income: again the starting point is the same, taxable income, but from this we must deduct personal contributions that were paid by relief at source such as contributions to personal pensions and we have to remember as well that if there are any employer pension contributions being paid under a new salary sacrifice agreement that these have to be added back into threshold income as well.

    We will look at some more detailed examples of those income definitions and the effect on the annual allowance. We have Niall; salary of £150,000 also a member of his employer’s occupational scheme. His employer pays 10% into that scheme and he pays 5% via net pay. Threshold income is fairly easy to calculate, it is just the client’s net income for the year, so £142,500 which will be his taxable salary. Adjusted income has the same starting point of £142,500 but we have to add the personal contributions he paid via net pay. That takes us up to £150,000 and then if we add the employer pension contribution of £15,000 that will take us to £165,000. Two questions then to ask. Is threshold income above £110,000? Yes, it is. And is adjusted income greater than £150,000? Which it is as well. So the answer to both of those questions is yes, and the annual allowance will be tapered. And the tapering will be as follows: the excess income above £150,000 is £15,000 – half of that is £7,500 which takes the annual allowance down from £40,000 to £32,500. To contrast that with the example of Evie. She has salary of £125,000, but she also has non-earned income which has to be included of £10,000. She’s a member of her employer’s group personal pension scheme. Contributions are 10% by herself and 5% by the employer. The threshold income calculation has an extra step in this case, so the taxable income is £135,000 but we have to adjust it for the personal contribution that she pays to the GPP, which is £12,500 and that takes her threshold income down to £122,500. Now if she was in a net pay scheme then there wouldn’t the extra step, her taxable income would already have been £122,500. For adjusted income; again we'll take the taxable income of £135,000 and to this we just have to add the £6,250 employer contribution which takes us to £141,250. So threshold income is greater than £110,000. But adjusted income is less than £150,000, so there is no tapering of the Annual Allowance for this client.

    In none of those examples have we included salary sacrifice, so I'll just explain that briefly. Salary sacrifice should have no effect on adjusted income (that’s when salary is being sacrificed for an employer pension contribution). The reason for this is that either the salary or the pension contribution that you exchange it for will be included. So if we have a client with salary of £155,000 who also receives an employer contribution of £5,000 then the adjusted income will be £160,000. If you then sacrifice £10,000 worth of salary; even though the salary will go down to £145,000 - because the employer contribution is increased by that £10,000 to £15,000 - the adjusted income level stays the same. So salary sacrifice doesn’t reduce the adjusted income calculation at all.

    Salary sacrifice is more of an issue for threshold income, however if it’s a new salary sacrifice, (post budget salary sacrifice) then this shouldn’t reduce threshold income either - and for the same reason as above because you are either including the salary or the pension contribution that is exchanged for. However, if you have an existing salary sacrifice agreement then this should continue to reduce threshold income because the salary should not be included because it’s already been sacrificed and nor should the pension contribution be included because it’s protected under that rule. So if we have a client whose salary post sacrifice is £105,000 and they’d sacrifice £10,000 say; their threshold income will remain at £105,000 because that contribution is not included. On the other hand, if you have a client whose salary post sacrifice is £105,000 but that was a new post budget salary sacrifice, then that £10,000 employer contribution will be added in, so their threshold income in that case would be £115,000.

    The salary sacrifice rule is a little bit of an odd rule because it is attempting to prevent people from reducing their threshold income which it will do. Again we have a client with income of £115,000 if they attempted to use salary sacrifice to get their threshold income downbelow £110,000 by making a £6,000 pension contribution (there was a new salary sacrifice agreement) it would have no impact because the threshold income would remain at £115,000: because you've got the salary of £109,000 plus the £6,000 employer pension contribution. However, you can achieve a reduction in threshold income simply by paying personal contributions under relief at source or to an occupational scheme. So if we have the same client: salary of £115,000 but instead of salary sacrifice they just pay a personal contribution to a GPP of £6,000 then their threshold income would become £109,000. In light of this the salary sacrifice rule seems a bit of an odd rule because if you simply just pay a personal pension contribution rather than salary sacrifice, then you can achieve the very thing that that rule seems to be trying to prevent. So we're not sure what that rule is for. It could just be an indicator of the government’s dislike of salary sacrifice generally. It’s worth just pointing out that this isn’t a planning opportunity really: it has very limited scope. It’s just really to reinforce the point about how threshold income itself is calculated. Okay, that’s the less interesting bits out of the way, I suppose, I will hand you over to Chris Jones now.

    Chris Jones: Thanks Tom. Let's just have a look at the taper calculation and how the Annual Allowance charge applies. So we take Angus with £184,000 income, threshold income is above £110,000. Pension input of £30,000 so the Annual Allowance to be tapered with reference to the adjusted income as Tom has explained. £34,000 over the threshold, so that has reduced his Annual Allowance by £17,000 so his Tapered Annual Allowance is £23,000, contribution of £30,000 means he had an excess of £7,000. The Annual Allowance charge, the excess is added to the clients’ other income and taxed at their marginal rate, so in nearly all cases this will be 45%. Where there is an Annual Allowance charge there are two possible options to pay it. First one the client can just pay it directly themselves via their self-assessment return. The other option which is normally more favourable is the scheme pays option. Unfortunately, schemes are only obliged to pay the charge where the annual amount charged is at least £2,000 and the total savings into that scheme are at least £40,000 in the year. So in many cases, clients subject to the Tapered Annual Allowance won’t automatically qualify for the scheme pay option and will have to pay the charge from their own funds.

    An additional complication with high earners will be the Lifetime Allowance. Where both the Annual Allowance charge applies and the Lifetime Allowance charge applies, is it worth having a pension contribution at all? Take someone way in excess of the limits with earnings of £300,000 and benefits already in excess of the Lifetime Allowance, but they continue to receive an employer contribution, presumably because there’s no other option. This will often be the case with finance salary schemes. Assuming the full £40,000 contribution continues they face an Annual Allowance charge of £30,000 so that’s 45% on £30,000 that’s £13,500. The net benefit is £26,500 effective rate of 33.75%. Now to keep it simple assume they were to withdraw that money straightaway, they face a 55% Lifetime Allowance charge leaving them with just £11,925. The effective rate of tax on that is over 70% and if you just look at the amount in excess of the Tapered Annual Allowance, so the £30,000 on top, the effective rate of tax would be around 75%. So yes, it would be better than nothing but clearly additional salary would be far better than a pension contribution in this situation. Also note that there are situations where it could actually be more than 100% if for example you had fixed protection, carried on paying employer contributions and lost that fixed protection.

    A bit of good news though is that Carry Forward is still available. The Carry Forward in the year prior to ‘16/’17 will be based on the standard £40,000 allowance or £50,000 for ‘13/’14. To take an example here in ‘16/’17 they were affected by the Tapered Annual Allowance in full but they have £20,000 carried forward allowance available from each of the three previous years, so they could use that as a one off contribution of £70,000 or if their employer wanted to continue contributions, say for example at £30,000 they could carry on paying those for three years without any impact. That’s going to be very valuable for all clients who haven’t already maximised their carried forward planning.

    Going further on looking forward to when Tapered Annual Allowance applies we don’t have any technical guidance on this yet, but we are expecting it to work in the same way, it's just going to be a lot more complicated to work it out each year. Carry Forward here will still be very valuable particularly for those with fluctuating earnings. So a client here in 2021 they have the full Annual Allowance, they can also look back three years. In ‘17/’18, they’ve got £20,000 from there, nothing from ‘18/’19, £10,000 from ‘19/’20 so if they could make a full contribution of £70,000. So this is very useful where clients don’t know how much they’re going to earn in a particular tax year. They could either sweep up at the end of the tax year or even if they didn’t have time for that they could use a £10,000 contribution and then look back for any excess they have to carry forward from the three previous tax years.

    Do employers with highly paid staff need to take any action? Well one way of looking at it is it's the employee who pays the Annual Allowance charge and not the employer, in addition employers will not know the full income position of their employees, nor indeed will some employees themselves until the end of the tax year. Does that mean the employer could just carry on regardless and do nothing? Well these are going to be some of the most senior employees in the business and you'd expect, in many cases, employers would want to retain them. The employees themselves are going to be worse off, so they’re going to be looking to the employer to see what they’re willing to offer. So is the employer willing to offer a different benefit package or can the employee negotiate a different benefit package? If they can’t a taxed employer pension contributions is better than no benefit at all. One option, we can look at, is to compare an employer pension contribution with having increased salary. With the employer contribution they will pay the Annual Allowance charge and then when they come to take the pension benefits they’ll have 25% tax free, then I’ve assumed 40% tax on the rest, as I expect them to be higher rate tax payers in retirement. Now compare this with the restructuring of benefits by converting the excess to salary. Now to make this contribution neutral for the employer they would need to reduce that salary by the employer and national insurance contributions. They pay the £10,000 employer contribution instead of £30,000 in salary, that’s reduced by the 13.8% to £26,362 then with that I've assumed they’re paying 45% tax on the salary, national insurance and then again higher rate tax when they come to take their pension. This is a simplified example that shows that this is cost neutral to the employer but does give a significant benefit to the employee, that’s certainly one option employers could consider. Or if they want to be more generous they could offer even more, that will also need to negotiated on an individual basis.

    A broad brush approach probably wouldn’t work because not every individual will have the minimum 10K allowance and also they are going to have other income and other pension provision the employer’s not aware of. So we just have three clients there, A, B and C. A is straightforward they’ve just got salary, so the employer could look at them, work out their Annual Allowance and decide what pension contribution they wanted to pay, no problem. But B they see their salary is £210k so they assume they can pay them 10,000, but they don’t know they might have a £20,000 additional pension, personal pension the are funding. And then client C they could assume they’re perfectly fine because their salary is £140,000 but they could have substantial other income from investments or property. In addition, many could have Carry Forward to cover excess contributions in the short term. An employee may prefer to have a contribution, and use scheme pays, particularly with a final salary scheme.

    Opening a dialogue with employees will often be the best approach, because whatever you do the thing will be to really make sure it’s clear to your employees what you're doing so for example in client B above, if they did reduce the contributions to £10,000 they have to make it very clear that any other contributions they make themselves would be subject to the Annual Allowance charge. One possible option also would be to cover anybody that may be affected, reduce their annual contribution to £10,000 a year and then you carry forward to sweep up from the previous year and you could do that on an ongoing basis You could also do it at the end of the year but that could have more complications trying to get that in in time. So using Carry Forward might be a neater option, so you pay a £10,000 and then you look at what Carry Forward you've got from the previous year, or you could do it from three previous years. The thing with that, the complication with that is you probably need to change the employee contract, and that might need to be done on an individual basis, so you give X amount as pension then X amount in excess as salary but it won’t be straightforward.

    In addition to this, employers also have automatic enrolment duties to comply with, so Tom is just going to briefly tell you about that.

    Tom Coughlan: Thank you Chris, yes, so the interaction between automatic enrolment and the Tapered Annual Allowance is potentially problematic. The issue is that auto enrolment imposes a minimum contribution whereas the Tapered Annual Allowance imposes a maximum contribution before tax charges apply. And in some cases the minimum under automatic enrolment can be higher than the maximum tax privileged contribution of the Tapered Annual Allowance. So if we just look at a very quick example. We have an employer operating a scheme on the set one basis, which means that they have to pay 9% of basic pay into the scheme to meet the minimum under the rule. If you have a client in a scheme on that basis earning £250,000 in basic pay, then their minimum contribution would be £22,500. Now obviously their salary is sufficiently high that their Tapered Annual Allowance is reduced down to £10,000; so in complying with one set of rules they’ve potentially generated a tax charge under another. So what can an employer do in this instance? Well, there’s a number of solutions: the first is to use Carry Forward so that minimum contribution of £22,500 would only give rise to a tax charge if there wasn’t Carry Forward to cover those excess contributions. But obviously that is only a short term solution and Carry Forward will run out eventually. The other option is just simply to pay the Annual Allowance charge. The employee pays that charge as Chris said and so it may be something that they are willing to meet. In that case it would just be a matter of looking at the net benefit of receiving the full contribution plus the tax relief, less whatever Tapered Annual Allowance charge there would be, and also considering the potential tax on extracting the money from the pension and just comparing that with the alternative; so perhaps compare it with receiving salary and then just look at the effective tax rate. But simply paying the Annual Allowance charge isn’t always a bad option and it’s certainly worth just weighing up the tax consequences of doing that compared to receiving other benefits instead. If the employer does want to reduce the contributions to make sure that they haven’t contributed to a tax charge for their employee, then there’s a number of ways they can incorporate that within the automatic enrolment rules. One is to switch to an entitlement check, which is a check under the automatic enrolment rules that at least the statutory minimum contribution is being paid under the automatic enrolment rules: that statutory minimum will normally be 8% of earnings within the qualifying earnings band, which starts at about 5,800 and will end at 43,000 next year. 8% of earnings in that band comes out just short of £3,000, so a £10,000 contribution would certainly meet the absolute statutory minimum under automatic enrolment. Or alternatively they could switch to the standard qualifying earnings basis for those clients that are affected but they have to remember of course that these employees may be entitled under their contracts to a certain level of contributions, so they can’t just reduce the contributions. In most cases they will have to offer some alternative benefits as Chris described on the previous slides.

    That’s just a very brief summary of the issues for automatic enrolment. Sandra is now going to take you through some of the other resources that we have that cover these issues.

    Sandra Hogg: Thank you Tom. As Tom and Simon have already mentioned the results of the government’s recent consultation paper on the future of pensions tax relief are expected to be announced in the budget on 16th March. Whilst it’s unlikely that radical reforms to pensions tax relief such as a flat rate could be implemented on that day, anti-forestalling provisions may prevent anyone benefitting from the current rules whilst legislation is being agreed and whilst system changes are being made or we may see a less radical but nevertheless hard hitting change such as a further reduction to the Annual Allowance. Either way it may be important to maximise pension funding in the lead up to 5th April and if possible, prior to 16th March. Many high earning individuals will be affected by the forthcoming reduction to the Lifetime Allowance and many of these same individuals will be looking to maximise pension funding before the Tapered Annual Allowance applies on 6th April and will be asking how much can I pay into my pension without any Tapered Annual Allowance charge. What is my opportunity to maximise contributions using Carry Forward? How much tax will I pay if I and my employer maintain the current contribution strategy? We have a range of material to support you on tax year end planning and planning ahead of the Tapered Annual Allowance, in particular our January and February editions of TechTalk our February edition being a tax year end planning special edition. The slide also shows links to articles related to Tapered Annual Allowance and Lifetime Allowance planning. We have a wide range of articles at this link so please do take a look after this Webinar. You can also find our previous MasterClass webinars and podcasts on our website, along with the detailed explanation of the issues Tom outlined with automatic enrolment and the Tapered Annual Allowance and our Carry Forward calculator can be used to help you calculate maximum funding in the run up to 5th April or 16th March. The screen shot is on the next slide showing what our Carry Forward calculator looks like. I'll now hand back to Eva our operator to open up for questions.

    Operator: Thank you. Ladies and gentlemen if you would like to ask a question at this time please press *1 on your telephone keypad. Please ensure that the mute function has been switched off to allow your signal to reach our equipment. Once again please press *1 to ask a question over the telephone.

    Chris Jones: While you're waiting we've got quite a few come through online, three or four are exactly the same actually about what constitutes a new salary sacrifice arrangement and increases to salary sacrifice current schemes in place. We've seen some guidance from HMRC on this and the good news is their view is if it’s done properly salary exchange should be a permanent change to the contract, so what we sort of see as renew shouldn’t really be a renew because you should be starting from the basis where you've already exchanged that amount, so if done properly it will only be the extra bit you sacrifice the next time you come to do so.

    So we've got quite a few here I'm just trying to…

    Simon Harris: Eva, have we got any calls coming through on the line?

    Operator: We have no telephone questions at this time but as a reminder ladies and gentlemen it’s *1 to ask a question over the telephone.

    Chris Jones: Yeah, one on auto enrolment for you Tom, someone is suggesting putting the affected employees into a qualifying earnings category, then topping up their reduced annual allowance would be a sensible solution.

    Tom Coughlan: Yeah absolutely. If the employer does decide that the best thing is to reduce the contributions to help their employees avoid an annual allowance charge, then certainly switching to qualifying earnings at least for those people affected is a good idea. Or if they only have perhaps maybe one or two affected individuals then use the entitlement check which essentially achieves the same thing.

    Chris Jones: Yeah, we have one on DB and scheme pays, the rules would still be the same, the scheme is only obliged to pay if the charge is over 2,000 and the savings, so pension input in terms of a DB is over 40,000. The schemes can choose to pay and we may see more schemes giving that option even though they don’t have to give that option.

    Tom Coughlan: Yeah we have a Carry Forward question as well, which says Carry Forward available once used annual allowance are you saying that the annual allowance of £10,000 per high earning client applies before Carry Forward rather than the £40,000 usually available and which would attract a tax charge to higher earners, so not to tax above £10,000 allowance but Carry Forward exists.

    Chris Jones: I'm not quite sure what that question is getting at but basically, if the Tapered Annual Allowance applies you'll have a reduced Annual Allowance, so say that’s only £10,000, you could then look back for any available allowance from the previous three years. For the previous three years from the first year we'll go back to the standard 50,000; 40,000 and 40,000, so there’ll be no annual allowance charge as long as you're within your tapered annual allowance plus any carried forward allowance, that’s why it’s very, very useful that Carry Forward still exists.

    Tom Coughlan: Another question on salary exchange. Are you anticipating changes to salary exchange for pensions in the budget?

    I suppose we just don’t know what those changes are going to be but there does seem to be a general mood around salary sacrifice that the government may try and close it down. Obviously that’s entirely speculative so we're just going to have to wait for the budget and see what happens.

    Chris Jones: Another question, is National Insurance also payable on the Annual Allowance excess payment? Now that’s a good question. No, that’s sort of one bright side I suppose, you're only paying a tax charge not NI charge as well.

    Another one, if the Annual Allowance charge is applied do you still get your 25% tax free cash when you come to take benefits? Yes, you do, so you're only taxed on 75%, you're still taxed twice but you still get your 25% tax free cash.

    Tom Coughlan: Quite a good question on EIS and VCT contributions. Just to confirm EIS VCT contributions will not work to reduce an employee’s income?

    That’s absolutely right because the income definitions refer to step one and step two of the income calculation whereas the EIS and VCT tax reduces are knocked off a little bit later, so VCT EIS should have no impact on the calculation of adjusted income and threshold income.

    Chris Jones: Another question has come in after my answer about salary exchange. So just to clarify what I'm basically saying and what we're seeing from HMRC Guidance is if you set up your scheme correctly and then you amend it correctly, the existing arrangement shouldn’t be caught it will only be the additional bit you've sacrificed when you come to do your renewal.

    Tom Coughlan: Another question on scheme pays. What is the process for a scheme member requesting to pay the Annual Allowance charge via scheme pays?

    They will have to approach the provider. The provider will normally have a scheme pays form and if they’re eligible for scheme pays then the scheme then has to deduct the Annual Allowance charge. But it’s also important that the member completes a self-assessment form so they’ve made HMRC aware that this tax charge has been met out of the fund rather than paying it themselves at the end of the tax year.

    Chris Jones: Thanks for all your questions, there’s lots here so we may have missed some but we've got a record of all of this and we will e-mail you back answers for any that we haven’t covered. Are there any on the line?

    Operator: There are no telephone questions at this time, I would now like to hand back to Mr Simon Harris for any additional or closing remarks.

    Simon Harris: Thank you Eva. Firstly, thank you to Tom and Chris for today’s presentation which I hope you've found informative. As I mentioned at the start of the call we have just a month now until the budget and 7 weeks until the financial year end. The budget brings with it the possibility to changes to tax relief and it may be prudent to consider making plans towards this deadline in the event of any changes. Whilst they may not impact immediately, we have seen before, the use of anti-forestalling measures to prevent any last minute surges. In the new financial year, it means the introduction of the Tapered Annual Allowance and reduced Lifetime Allowance. It’s important that contact is made with those clients who could be impacted, so those who have high levels of pension input, who could see their annual hours restricted, have we captured all of their pensions input from all of their pensions arrangements, this is very important, are we aware of what Carry Forward is available from previous years to help with any accrual currently and to avoid any future Annual Allowance tax charges. The Scottish Widows calculator could help with this particular issue now. Individuals impacted by the reduction to the Lifetime Allowance from 1.25 to 1 million and particularly those opting for fixed protection 16 where future pension accrual needs to be stopped by the 5th April. Has a full assessment of all the options been carried out and all pensions built up to date valued? For more information on the Lifetime Allowance you can review the previous MasterClass on this topic available from the website or catch up with the TechTalk articles or speak to your Business Development Manager or Account Manager.

    Additional information highlighted by Sandra Hogg and the team including the Carry Forward calculator is also available on the Scottish Widows Advisor Extranet. Again a recording of today’s presentation will be made available should you wish to review the content and CPD certificates will also be available. Thank you for listening today and that concludes today’s presentation. Thank you.

    Operator: Ladies and gentlemen that will conclude today’s conference call. Thank you for your participation, you may now disconnect.

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