# Pensions and tax: Social housing case study

Meet John, who has been a member of a defined benefit scheme for 12 years. His pensionable salary is £75,000 and has accrued a pension of £15,000 p.a..

1000

Partner

KPMG in the UK

Contact

### Also on KPMG.com

John's pensionable salary is £75,000 and has accrued a pension of £15,000 p.a.. His Pension Input Period (PIP) runs from January to January (the period looked at for tax purposes). One year down the line his salary has increased to £85,000 and so, along with another year of pension accrual, he now has a pension of £18,417 p.a.

Depending on the tax year in question, this scenario brings about very different tax charges. The table below summarises these, and an explanation is given in the remainder of the article.

Year Salary at start of year Salary at end of year  Tax charge 2013/14£75,000£85,000 nil2014/15£75,000 £85,000 £3,2752015/16£75,000 £85,000 nil2016/17£75,000 £85,000 £11,956

### 2013/14

The value of the increase in pension over the year for tax purposes is calculated as 16 times the difference between the start and end pension, allowing for the effect of inflation. For John, this is £49,387 for the 2013/14 year. The Annual Allowance for 2013/14 was £50,000 and so John is not liable for any tax.

### 2014/15

Had this been the 2014/15 tax year, when the Annual Allowance reduced to £40,000, John would have been nearly £10,000 over the Annual allowance and therefore, assuming he had no allowances from previous years to carry forward, he would have been liable to a tax charge of £3,275 (using a 40% marginal income tax rate).

### 2015/16

The tax limit for 2015/16 changes again, and this time it gets complicated (if it wasn’t already). 2015/16 has been split into two sub-periods. The first ends on 8 July 2015 and the second ends on 5 April 2016. This is part of the government’s plan to align everyone’s PIP to the financial tax year from April 2016 onwards.

For John this means he has one period running from 1 January 2015 to 8 July 2015 and another from 9 July 2015 to 5 April 2016. The Annual Allowance for the first period is £80,000 and for the second it is nil. However, any unused allowance up to £40,000 can be carried into the second period.

Running through the maths for John means that he would have no liability for 2015/16.

### 2016/17

Come 2016/17 the tax rules are going to change yet again for those with an “income” above a certain amount. The Annual Allowance for those earning above £150,000 is to be reduced on a tapering basis so that it falls to £10,000 for those earning above £210,000. For every £2 of income above £150,000, an individual’s Annual Allowance will reduce by £1.

It may appear that John will not be affected by this change given his salary at the end of the year is £85,000. However it is not as straight forward as that.

Threshold Earnings includes income from work and investments, including benefits in kind and salary given up under salary sacrifice arrangements, less any contributions paid under relief at source arrangements less certain lump sum death benefits.  If this is over £110,000 then Adjusted Income is a consideration.

Adjusted Income is Threshold Earnings plus the member’s contributions to the pension scheme plus the employer value of accrued pension over the year. If this is greater than £150,000 then the taper will apply.

Working this through for John leads to a reduced annual allowance of £18,777. Given the value of his pension accrual over the year is nearly £50,000 this leads to a liability on £29,890 which, at 40% tax, is a tax charge of £11,956.

### Next steps

This case study highlights not just the complexity of the pensions tax environment but the impact the change from April 2016 is going to have on individuals who may think their income isn’t high enough to be caught by the new tapering rules. It is important that staff are made aware of these changes and are supported through them to ensure the wider reward package offered to employees continues to remain valuable and competitive.

Submit