The Implications for SSAS (Small Self Administered Scheme) from the July 2015 budget.
The July 2015 Budget, the first from the new Government, announced some forthcoming changes to pension and tax rules in the UK that will affect our typical SSAS (Small Self Administered Scheme) client – that is directors and owners of SMEs.
The Changes that affect SSAS are..
Increased Tax on Dividends
Business owners often receive most of their earnings as dividends due to their lower tax. From April 2016, taxation of dividends is changing:
• A tax-free allowance of £5,000 of dividend income for all taxpayers
• Above £5,000: Basic Rate Taxpayers 7.5%; Higher Rate Taxpayers 32.5%; Additional Rate Taxpayers 38.1%
The immediate reaction to this could be to pay more earnings as pension contributions in order to reduce the tax burden and ensure the Annual Allowance is utilised each year…..However:
Annual Allowance Reduction for High Earners (over £150k)
From 6 April 2016, where an individual’s GROSS threshold income (which includes pension contributions) is between £150,000-£210,000, the Annual Allowance will reduce by £2 for every £1 of earnings so, at £210,000 the Annual Allowance is £10,000.
Those who are in flexi-access drawdown or who have received uncrystallised fund pension lump sums will continue to have an Annual Allowance of £10,000.
Carry forward from 2013/14, 2014/15 and 2015/16 will not be affected and will stay at £50,000, £40,000 and £40,000 respectively regardless of earnings, but only available to those who have been a member of a Pension Scheme in those years.
Pension Input Periods Fixed at 5 April
From 8 July 2015, all Pension Input Periods (the period used to assess contributions against the Annual Allowance) was fixed at 5 April. To do this, the Chancellor provided transitional relief, effectively creating two Pension Input Periods in the current tax year.
• The first period from 6 April 2015 to 8 July 2015
• The second period from 9 July 2015 to 5 April 2016
This means that anyone who had pension contributions paid for them or by them up to the Annual Allowance of £40,000 before 8 July has another Annual Allowance of £40,000 for the period to 5 April 2016. However, anyone who had a Pension Input Period ending between 8 July and 5 April has had this removed and automatically changed to 5 April from now on.
This could be beneficial to anyone who did maximise contributions before 8 July but will prevent anyone from using Pension Input Period manipulation after that date to maximise pension contributions.
Lifetime Allowance Reducing to £1,000,000 from 6 April 2016
Whilst announced in the March Budget rather than in July, this reduction in an individual’s total lifetime retirement savings should also be given consideration alongside these new rules.
So what do these changes mean for Small Self Administered Scheme?
As ever, in the world of pensions, these changes have implications that vary depending on the individual’s situation.
In addition, whenever new rules are announced by the government, they can seem complicated. As specialists in SSAS we are fully up to speed with the new legislation, so please contact us or call us on 0121 693 0690 for a no obligation chat.