Bidding a final farewell to the pre/post-alignment tax year

Look through money in jar image

The dust settled fairly quickly following what was an uneventful Autumn Budget 2018, especially from a pension and retirement planning point of view. This was very much welcome, and the absence of new rule changes will make planning for this tax year end a bit more straightforward for most clients and advisers than in previous tax years.

One consideration that does still need to be taken into account, for one last year, is the transitional measures for the 2015/16 tax year in respect of the Annual Allowance.

While it’s good to be waving goodbye to extra complexities, this one also presents a planning opportunity for individuals who were a member of a registered pension scheme during that period.

It’s worth reminding ourselves how the transitional measures from 2015/16 work ahead of this tax year end.

Background: Summer Budget 2015

Unlike in 2018, the 2015 Summer Budget was eventful, with George Osborne announcing that Pension Input Periods (PIPs) for all pensions were to be aligned with the tax year from the start of the 2016/17 tax year.

This was a welcome simplification of the rules. However, he also announced a wrinkle for the 2015/16 tax year in that it would be split into a ‘pre-alignment tax year’ and a ‘post-alignment tax year’, with the latter starting on the day after the Budget, 9 July 2015.

Pre/Post-alignment tax year

A summary of the dates, Annual Allowance and carry forward that applies to each is shown below.

Start date End date Annual Allowance Carry forward available
Pre-alignment 06/04/2015 08/07/2015 £80,000.00 £40,000.00*
Post-alignment 09/07/2015 05/04/2016 £0 £40,000.00

*to post-alignment period only

The Annual Allowance for the pre-alignment tax year is £80,000, so as not to penalise the individuals who had contributed £40,000, closed their PIPs and contributed a further £40,000.

The Annual Allowance for the post-alignment tax year is actually nil. However, any remaining pre-alignment allowance can be carried forward into the post-alignment tax year up to £40,000, not £80,000. Unused allowance from the post-alignment tax year can be carried forward to subsequent tax years.

Overall, this means some clients have (or had) an extra £40,000 allowance above what they might have expected.

Tax year end planning

The rules state that you can carry forward from the three previous tax years. Furthermore, there is a strict order in terms of which tax year’s allowance is used. The current tax year’s allowance is used first, then you go back to the earliest of the three previous tax years.

2015/16 still counts as a single tax year in this respect, but only unused allowance still available from the post-alignment can still be used.

This means there are two important planning points.

Firstly, 2018/19 is the final tax year in which clients can take advantage of the extra £40,000 from 2015/16. Clients will need to take action by 5 April 2019 if they want to use their allowance from 2015/16.

Secondly, in order to access their unused allowance from 2015/16, clients will need to make contributions and accrual of at least £40,000 to use up all of this tax year’s allowance first.

Case study

David is a member of an occupational defined contribution pension scheme; his employer contributed £3,000 each month in the 2015/16 tax year.

Total pension input in the pre-alignment was therefore £12,000. The carry forward available in the post-alignment tax year is the lesser of £40,000 or £80,000 minus total pre-alignment contributions. £40,000 in this case.

As David continued to receive £3,000 monthly contributions from his employer, his total pension input for the post-alignment is £24,000. He can still make use of £16,000 carry forward (£40,000 minus (£3,000 x 8) = £16,000).

If David wanted to use up this remaining carry forward, he would need to make a one-off contribution by 5 April 2019.

Technical Consultant

Before starting at AJ Bell Grant studied Forensic Science, Analytical Science and Law in Sheffield, graduating in 2013. Prior to University he studied Chemistry, Physics, Maths and Design Technology at A-level. Grant started working at AJ Bell in the Benefits Department, progressing to be a Senior Administrator before moving to the Technical Resources Team in 2017. He is currently working towards a Diploma in Regulated Financial Planning and is part of the GETsmart Training Team, which involves conducting and scheduling internal technical training.