Another pension annual allowance cut
04 January 2017
When pensions flexibility was announced in March 2014, it did not take long for tax planners to realise that it offered an interesting opportunity to “pay” the over-55s. The idea was that, instead of pay which is subject to national insurance contributions (NICs) and full income tax, contributions to a pension could be made from which the employee immediately drew benefits. As a result, NICs would disappear and income tax would be reduced by a quarter because of the tax-free lump sum.
Before pension flexibility became reality, the Treasury acted to limit the scope for such creative remuneration by introducing a £10,000 money purchase annual allowance (MPAA) to apply in such cases. In the Autumn Statement, the Chancellor announced another turn of the MPAA screw: from 2017/18 it will be reduced to just £4,000, saving the government an estimated £70m a year.
The rules for triggering the MPAA mean that once you become subject to it, there is no escape. However, it is possible to extract money from your pension in a way that does not bring the MPAA into play. This can be particularly useful if you are a private company shareholder planning a gradual retirement. Please talk to us for more details. Click here to get in touch.