Experts answer key questions on Pension Input Tax

Experts in Accountancy and Financial Planning, Lovewell Blake are often asked about Pension Input Tax. Here, their experts break down the key points for you.

What is the Pension Input Tax charge?

Each individual is entitled to contribute up to £40,000 per tax year to their retirement, subject to certain conditions. This limit will be reduced for high earners. Those individuals whose income is over £150,000 per annum will see the amount they can contribute reduced by £1 for every £2 over that threshold until their pension input allowance is reduced to a minimum of £10,000 per annum. This is referred to as tapering.

If a person is deemed to have contributed more than their pension input allowance, the excess is subject to a tax charge, at their highest marginal rate.

However, if an individual has contributed less than their pension input amount in a tax year, the amount of underpayment can be carried forward and offset against a year in which they exceeded the allowance.

It is possible to go back three tax years for the purpose of calculating carry forward amounts.

How is my Pension Input value calculated?

The manner in which the pension input for members of the NHS Pension scheme is calculated is NOT based upon the amount the member contributes but by how much their pension benefits increase over a given pension input year.

For an example of this please see here.

If the individual had sufficient carry forward allowances from previous years, these could be used to reduce, or even avoid, an input tax charge.

My earnings are below the £150,000 level but I still have a tax charge, why?

The rules surrounding the Input Tax Charge are complex and whilst noting the £150,000 threshold has been made, people need to be aware of the income test amount of £110,000.

Once a person’s income reaches £110,000, the amount of their pension input is added to see whether or not the total amount has exceeded the £150,000 threshold and tapering needs to be applied.

If the combination of an individual’s income and pension input amount exceeds £150,000, tapering will be applied and could give rise to a pension input tax charge even though the scheme members starting income was below £150,000.

Note: When calculating threshold incomes, all sources of earnings must be taken into account, including earnings from employment, private earnings, dividend income, rental income, deposit interest etc.

There are a number of strategies for mitigating the effects of the Lifetime Allowance and pension input tax charges.

For further information please contact Graham Walker of Lovewell Blake Financial Planning Limited.

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