The money purchase annual allowance (MPAA) places a limit on the amount of tax efficient pension contributions that can be made by employees who have already accessed their pension flexibly. The standard annual allowance is £40,000, whilst the MPAA was originally set at £10,000, it was revealed in March 2017 that this was to be lowered to £4,000 from the beginning of the 2017/2018 tax year.
Although changes to the MPAA were put on hold after the snap general election was called in June, the regulation shifts are now being instigated with changes backdated to April 2017. Those who’ve accessed their pension through the pension freedoms will be notified by their pension provider if the MPAA affects them. In the majority of cases, this will only be people aged 55 and over.
Anyone who accesses their pension flexibly and makes more than £4,000 worth of contributions during the 2017/2018 tax year will be subject to a tax charge. It’s crucial to remember that this consists of both contributions made by the employee and those made by their employer. The charge is calculated based on your income tax rate. As such, basic rate taxpayers will be charged at 20% of the amount they are over the limit, higher rate taxpayers at 40% and additional rate taxpayers at 45%—basically removing the tax relief benefit of member contributions and income tax exemption for contributions made by their employer.
So what can employees do to escape being caught out by the new, lower allowance? One choice is to opt out of a workplace pension, but this would mean the benefits of employer contributions would be lost. Another option for others will be to lower their total contributions, although this may be governed by the rules of a particular scheme. Again, reducing your own contributions will typically mean your employer’s contributions go down too, although some employers may agree to pay a higher salary to balance this out.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
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