Experts are warning that high-earningsavers are facing the risk of losing out on considerable sums of money, as a result of widespread confusion on the subject of recently-introduced annual allowance taper rules. The annual tapered allowance – a tax relief cut for high earners – was rolled out as of April 6 this year after being introduced in 2015’s Summer Budget. This, despite the fact that much of the industry complained that it simply made an already complex system even more complicated.
Savers presently qualify for a maximum tax relief allowance of £40,000, though in instances where annual income breached the £150,000 barrier, this total annual allowance is cut by £1 for each £2 of extra income. This in turn means that when an individual earns £210,000 annually, this works out as £60,000 over the threshold and thus a £30,000 reduction in tax relief. In this case, the person’s maximum allowance would be just £10,000.
The somewhat complicated system is made all the more convoluted by the fact that under the new rules, it is also possible for higher earners and additional rate taxpayers to carry forward up to three years’ worth of unused allowance.
Alliance trust savingspropositions manager Brian Davidson said:
“With all this radical change to pensions over the last few years, savers could easily miss out on tax relief in the new tax year,” warned Brian Davidson, pensions propositions manager with Alliance.
“Unclaimed tax relief can be as high as £58,500 which would make a substantial difference to anyone’s. When people realise that they are affected by the tapered annual allowance they could be forgiven for assuming that the carry forward rules will not apply which could be a costly error.”
The scheme has so far attracted little other than harsh criticism from the IFA industry, having made it increasingly difficult for savers to work out the best options for their own circumstances. Already, thousands have either been caught out by the new rules having breached their thresholds and summarily ending up out of pocket. In other instances, even greater numbers came close to doing so and were only steered in the right direction upon seeking professional advice and assistance.
The primary problem being that when a person’s total annual earnings fall between £110,000 and £180,000, it can be very difficult to work out exactly how they should be controlling their finances and savings. It’s necessary to take a comprehensive look at every element of their current financial situation, in order for the most appropriate decision to be made.
Again, doing so without professional advice may be borderline impossible for most.
Even the IFA community is being warned not to underestimate the complications of the new system – instead exercising due caution and adopting a methodical approach. The Money Purchase Annual Allowance which is likewise causing confusion among a great many savers, can likewise have a huge impact on long-term pension savings.
For more information on these or any other pensions and savings reforms, get in touch with the Haven IFA team today for an obligation-free consultation.