Summer Finance Bill 2015

Introduction

On 15 July 2015, the Government published its Summer Finance Bill (“the Bill”) with a view to introducing a number of provisions that were announced by the Chancellor in his Summer Budget.

In this Alert

• Key points
• Taxation of pensions at death
• Tapered Annual Allowance
• Changes expected in the Finance Bill 2016
• Next steps

Key points

• Tax on lump sums paid in respect of individuals who die aged 75 and over will be payable at the recipient’s marginal rate from the tax year 2016/17.
• With effect from 6 April 2016, the Government will restrict pensions tax relief for higher earners using a tapering mechanism.
• Some measures announced in the Summer Budget 2015 will not be legislated for until the Finance Bill 2016.

Taxation of pensions at death

As announced in the 2014 Autumn Statement, the tax rate that applies on certain lump sums paid on death will be amended from 6 April 2016.

Since 6 April 2015, lump sum death benefits can be paid free of tax (subject to any LTA charge) from a registered pension scheme if the individual was under the age of 75 when they died.  This is the case provided the lump sum is paid out within two years of the scheme administrator (generally, the trustees) becoming aware of the death, subject to certain limited exceptions.

A tax charge of 45% currently applies in respect of lump sum death benefits where the individual dies aged 75 or over.  The Bill will amend legislation so that, with effect from 6 April 2016, tax will be payable at the recipient’s marginal tax rate.

The 45% rate will still apply in certain circumstances, for example, where the recipient is not an individual or the lump sum is payable to an individual in their capacity as trustee, a partner in a partnership or a company director.  Such lump sums will be taxed as pension income, with tax deducted under PAYE.

Tapered Annual Allowance

The Bill also sets out how pensions tax relief will be restricted for those with “adjusted” incomes (ie taxable earnings including pension contributions, but excluding charitable contributions) above £150,000.

From 6 April 2016, for every £2 of adjusted income over £150,000 an individual earns, that individual’s AA will be reduced by £1.  The maximum reduction to the AA will be £30,000, so that anyone with adjusted income of £210,000 or above will have an AA of just £10,000.

To ensure this measure is focused on the higher and additional rate tax payers who are currently considered to be gaining the most benefit from pensions tax relief, those with income, excluding pension contributions, below £110,000 will not be subject to the new taper.  The Bill contains anti-avoidance provisions designed to prevent salary sacrifice arrangements set up on or after 9 July 2015 (the day after the Summer Budget) being used to take advantage of this new threshold income.

As currently, any unused AA from the three previous tax years will be available to be carried forward and added to an individual’s AA.

Transitional measures

In order to facilitate the taper, the legislation aims to align pension input periods (the period over which pension savings are measured for the purposes of testing against the AA) with the tax year by April 2016.

The Bill also introduces transitional rules to protect savers from retrospective tax charges resulting from aligning pension input periods with the tax year.  Under these transitional provisions, individuals will generally have an AA of between £40,000 to £80,000 inclusive (depending upon the amount of pension savings made before 9 July 2015) for the 2015/16 tax year only. 

Money purchase AA

Individuals who flexibly access their pension savings become subject to an AA of £10,000 for DC pension savings (“the money purchase AA”). If the individual exceeds the money purchase AA, they then become subject to a reduced AA (of £30,000) in respect of any (DB) pension savings (known as the “Alternative AA”).

Where an individual is subject to both the new taper and the money purchase AA rules, his or her Alternative AA will be reduced accordingly.

Changes expected in the Finance Bill 2016

Some of the changes announced in the Summer Budget are not covered in the current Bill and are expected to be included in next year’s Finance Bill. These include:

• the reduction of the LTA from £1.25 million to £1 million from 6 April 2016 and transitional protections for those with pension rights already over £1 million, and
• measures to introduce the secondary market for annuities in 2017.

Next steps

The Bill is expected to be discussed in Committee in the early autumn.

Guidance, including HMRC’s technical note on the transitional measures in relation to the AA will be updated after the Finance Bill 2015 receives Royal Assent.