Significant changes to pension input periods (PIPs) have been introduced and from 6 April 2016 all PIPs will run in tax years. These PIP start and end dates will not be able to be altered by either the provider or the member.
The summer Budget on 8 July 2015 introduced significant changes to pension input periods (PIPs). From 6 April 2016 all PIPs will run in tax years from 6 April to 5 April. These PIP start and end dates will not be able to be altered by either the pension provider or the member.
Many individuals potentially had the opportunity to fund a little extra into their pension in the 15/16 tax year. A brief summary of options is described in a table called ‘‘Pension Input Funding – July Budget’. To avoid widespread abuse of these changes HMRC introduced split ‘mini’ PIPs for the 2015/16 tax year. In theory it was possible in this tax year to have up to three PIP end dates within one tax year.
- Any PIP that has an end date after 8 July 2015 automatically ended on 8 July. This is called a ‘pre-alignment PIP’.
- Any PIP that had an end date after 5 April 2015 but before 9 July 2015 retained this date and is treated as a pre-alignment PIP. This then created another mini PIP which ran from this PIP end date to 8 July. This was also a pre-alignment PIP.
- Any PIP with an end date after 8 July in the 2015/16 tax year has 2 PIPs. The first PIP ran until 8 July as described in the first bullet point. The second PIP ran from 9 July to 5 April 2016. This second PIP is classed as a ‘post-alignment PIP’.
- Any PIP originally running for the 2016/17 tax year was cut short and also ended in the 2015/16 tax year on 5 April 2016. This is classed as a post-alignment PIP. Had this PIP started prior to 8 July this would also create a pre-alignment PIP under the first bullet point.
Example of three PIPs
The PIP originally ran from 6 May 2014 to 5 May 2015. Under transitional PIP rules there will be three PIP dates: 6 May to 5 May 2015, 6 May 2015 to 8 July 2015 (these mini PIPs are pre-alignment PIPs), and the last PIP running from 9 July to 5 April 2016 (post-alignment).
Example of two PIPs
The PIP originally ran from 10 October 2014 to 9 October 2015. This was changed to run from 10 October 2014 to 8 July 2015 and then 9 July to 5 April 2015.
As the PIP dates were significantly changed this inevitably has an effect on funding for annual allowance purposes. There were also cases where members have already funded for the 2016/17 annual allowances. HMRC had taken these individuals into consideration and whilst trying to ensure that people will not be disadvantaged were a few opportunities for people to have additional funding into their pensions.
To try to cater for these scenarios HMRC created a special annual allowance for these ‘mini’ PIP periods. For the pre-alignment (first ‘mini’) PIP period there is an annual allowance available of £80,000. This helped cater for those people who have already funded for the 2016/17 tax year. This higher annual allowance only applied for contributions made in the first mini PIP period.
A member has a PIP that runs from May to May each year and had funded £40,000 for the tax year 2015/16. In addition they had paid another £40,000 in June 2015 to fund the next PIP which would have ended in the 16/17 tax year. Under the new pre and post-alignment PIPs for the 2015/16 tax year the member will have two PIPs ending in the pre-alignment mini PIP period (the one ending as normal in May 2015, and the second mini PIP running from May to 8 July). All contributions made in these periods count towards the £80,000 annual allowance, so no excess contributions have been made.
For the post-alignment mini PIP, things work a little differently. The post-alignment PIP has no annual allowance. However, this PIP is able to carry over up to £40,000 of unused annual allowance from the pre-alignment £80,000. There is a calculation to determine how much annual allowance can be carried over. The calculation is the lower of: £80,000 minus pre-alignment PIP contributions, and £40,000. In this particular case the member will have no scope for further contributions as the pre-alignment PIP will have used the full £80,000.
The member had a PIP running 1 May to 30 April 2015 and had funded £30,000 in this period. Post July in the second mini PIP they were able to carry over £40,000 of the unused annual allowance from the pre 9 July mini PIP. (Lower of (£80,000 - £30,000 = £50,000) and £40,000, so £40,000 allowed)
The transitional mini PIPs for the tax year 2015/16 have meant there are now different calculations that may need to be done for carry forward depending on how the first mini PIP period has been funded and the membership for the client of a registered pension scheme. Generally when carrying forward you are looking at the current tax year and three previous tax years. However, when considering tax year 2015/16 you do need to consider both the pre and post-alignment periods -so effectively 4 years.
If the previous tax year in question is the pre-alignment tax year, any unused annual allowance from that ‘mini’ tax year is capped at £40,000.
Despite the annual allowance for the pre-alignment tax year being £80,000, if the amount of unused annual allowance for that year exceeds £40,000, the maximum amount that can be carried forward is limited to £40,000.
If the previous tax year in question is the post-alignment tax year and the individual was a member of registered pension scheme at any time during the pre-alignment tax year then no unused annual allowance can be carried forward from the post-alignment tax year. This is because the individual has a nil annual allowance for that ‘mini’ tax year in this case.
If an individual was not a member of a registered pension scheme at any time during a previous tax year then the individual will not have unused annual allowance to carry forward from that year.