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April 2016 Changes to Pensions

A number of changes are due to come into force on 6 April this year, which could have major implications for your pension and tax arrangements. This could in turn impact your future plans for retirement.

1. Reduction in the Lifetime Allowance

With effect from the 6 April 2016, the Lifetime Allowance for pension benefits will be reduced from £1.25 million to £1 million. This is the amount you can build up in pension schemes without triggering an extra tax charge. Also from April 2018 the Lifetime Allowance will be indexed annually by the increase in the Consumer Price Index (CPI).

2. Introduction of more Fixed and Individual Protection

To protect existing pension savers against the reduction in the Lifetime Allowance two new forms of lifetime allowance protection will be introduced. The two new Lifetime Allowance protections are Fixed Protection 2016 and Individual Protection 2016.

There will be eligibility conditions for these protections and conditions that will need to be met for them to remain valid. Your Financial Consultant will be able to discuss the eligibility conditions with you and will be able to let you know when you can apply for them.

3. Tapering of the Annual Allowance

The amount that you can save into pensions in a single tax year is usually limited to £40,000, this is called the Annual Allowance. From April 2016, the Annual Allowance will be tapered down for anyone with adjusted income (basically all income plus the value of pension contributions) more than £150,000. The allowance will be reduced by £1 for every £2 of earnings over £150,000, down to a minimum of £10,000.

During the 2015 Summer Budget, HMRC announced that all Pension Input Periods open on the 8th July 2015, ended on the 8th of July 2015 and the next Pension Input Period will be 9th July 2015 to 5th April 2016.

To ensure no one was penalised as a result of this immediate closing of all PIP's transitional arrangements were introduced. So the 2015-16 tax year is effectively split into two mini tax years for the purpose of annual allowance, the "pre-alignment tax year" and the "post-alignment tax year".

The Annual Allowance, the amount that can be saved into a pension in each tax year without incurring a tax charge, will remain at £40,000 for the 2016/17 tax year, but it will be tapered if you have income (including the value of any pension contributions) of more than £150,000.

If you are caught by this rule your Annual Allowance, from 6 April 2016, will be reduced by £1 for every £2 income over £150,000, down to a minimum of £10,000.

To prevent retrospective taxation the annual allowance has been increased to £80,000 for 2015/16, with £40,000 available for savings between 9 July 2015 and 5 April 2016.

4. End of Contracting-out for the NHS Pension Scheme

The introduction of a new flat rate State Pension will lead to the abolition of the State Second Pension, S2P, and hence to the end of contracting out. Contracting out allowed both employer and employee to pay lower National Insurance Contributions (NICs). After 6 April 2016 members of the NHSPS will have to pay full NICs.

This means that members of the NHSPS will see an increase in their National Insurance Contributions equivalent to about 1.4% of salary.

5. Introduction of the Dividend tax allowance

From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance of £5,000 which means that you won't have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.

The allowance is available to anyone who has dividend income, and the headline rates of dividend tax are also changing. You'll pay tax on any dividends you receive over £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band
This simpler system will mean that only those with significant dividend income will pay more tax.

Your local Wesleyan Financial Consultant can review your circumstances through a no obligation appointment. By assessing your individual needs, they can see the true impact of these changes and help deliver solutions to ensure your financial future is in good shape, so act now!.

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