Annual allowance

 

Your annual allowance is the amount you and your employer can contribute towards your Pension in a tax year before a tax charge is incurred.

 

If you exceed your annual allowance limit for a tax year, you still might not be liable for an annual allowance tax charge. HMRC rules allow you to carry forward any unused annual allowance for the three years before the current tax year, so if there is a one-off increase in your Pension contributions you’re less likely to incur an annual allowance charge. Please note, you must exhaust the current year's annual allowance before carrying forward any unused annual allowance and any unused allowance must be taken from the oldest tax year first.

 

You can find out the value of your contributions by checking your pension statement which can be accessed via Telefónica Rewards.

 

What is my annual allowance?

Historically, the annual allowance limit has been as follows:

 

Tax year Annual Allowance
2010/11 £255,000
2011/12 £50,000
2012/13 £50,000
2013/14 £50,000
2014/15 £40,000

 

For 2015/16 there were two Pension Input Periods (PIPs). A PIP is defined as 'the period over which the amount of Pension saving (Pension input amount) under an arrangement is measured'. The two PIPs for the 2015/16 tax year were split into a 'pre-alignment period' between 6 April 2015 – 8 July 2015 and a 'post alignment period' between 9 July 2015 – 5 April 2016. The pre-alignment annual allowance was £80,000 and the post-alignment annual allowance was £0. However, any unused AA from the pre-alignment annual allowance can be carried forward up to a maximum of £40k.

 

For the 2016/17 tax period the annual allowance is not fixed. From 6 April 2016 the annual allowance will be reduced to £40,000 tapering as low as £10,000 depending on your level of income. The tapering of the annual allowance applies where you exceed £110k Threshold income and £150k Adjusted income.

 

  • Threshold income (£110k)
    • This is broadly taxable income plus any change to salary sacrifice made after 8th July 2015
    • Includes salary, bonus, car allowance, benefits in kind, income from property, interest on savings, dividends, etc
  • Adjusted income (£150k)
    • This is broadly taxable income plus total value of Pension saving both at Telefónica and also private Pensions
       

The tapering of the annual allowance doesn't apply if your threshold income is below £110k. Your annual allowance then reduces by £1 for every £2 of adjusted income above £150k. Some examples can be found within the below table:

 

Adjusted Income Annual Allowance
£150k £40k
£180k £25k
£200k £15k
£210k £10k

 

To understand whether you have any unused annual allowance remaining for any given tax year you will need to calculate how much of your annual allowance you have ‘used up’ from the previous tax years. Remember, when calculating your annual allowance this should include all Additional Voluntary Contribution (AVC) lump sum payment(s) and all contributions to your DC (Defined Contribution) arrangement(s), including the employer contributions. You may also need to consider the value of any Bonus Sacrifice payments you have made into your Telefónica Pension Plan. You need to exhaust your current year’s AA before carrying forward any unused AA with any unused allowance taken from the oldest tax year first.

 

Towers Watson released an Annual Allowance Income Calculator as an interactive App. This free App allows you to estimate the total amount of tax relievable pension contributions you can make into your pension scheme during the next tax year. Please click here for more information on this App.

 

If you have any unused carry over you may wish to make additional pension contributions to maximise your overall tax free annual allowance. You can do this by:

 

  • Increasing your monthly employee pension contributions.
  • Making a one-off AVC payment.
  • Subject to eligibility, you may be able to sacrifice part or all of your annual bonus into your Telefónica Pension.

 

Exceeding the annual allowance

Under the Telefónica UK Pension Plan you will not be prevented from exceeding the annual allowance, however you may wish to carefully consider whether you would prefer to make savings that may result in you exceeding your annual allowance. Benefit accrual and contributions above the annual allowance will be subject to immediate tax at your marginal rate. Furthermore, these benefits may also be taxed when they're paid.

 

If you make contributions that may result in you exceeding the annual allowance, you could consider taking financial advice to ensure that you're saving in the most efficient way. Help on finding a financial adviser can be found here.

 

Where can I find out more information?

To view our previous slides and presentation on the April 2016 budget changes please click here.

 

If you would like to view more information on the various government protections or you would like to calculate your annual tax allowance you can click here to find out more.

 

Remember you can view your latest Pension Statement at any time by clicking here. If you would like to make any changes to your Telefónica pension contributions or investments please visit www.telefonicarewards.com.