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Pension Annual Allowance Changes / Btl Tax Change Interaction

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http://www.thelawyer.com/briefings/tapered-annual-allowance-and-pension-input-period-changes/3038351.article

Not seen interaction these two changes discussed. Was in a meeting on this and thought...ahhh this is going to impact BTLers.

Max pension contribution threshold to be tapered based on income from April next year. Currently £40kk contributions flat max.

If you have a couple of BTLs (and a salary), once mortgage tax relief rolls off (2017 +), good luck making tax free pension contributions (40£ k allowed currently).

Impact someone with several properties (taxed on income post 2017) and generous public sector pension / dB schene especially.

Edited by growlers

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in most cases, BTL income doesn't count as relevant earnings as far as pension contributions are concerned

but having it does enable more relevant earnings from other sources (a job for instance) to be put into a pension scheme

there are bound to be some people that have BTL income and a job where they are putting all their salary into the pension scheme

that the BTL income will have less surplus after the changes will certainly affect some BTLers

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in most cases, BTL income doesn't count as relevant earnings as far as pension contributions are concerned

but having it does enable more relevant earnings from other sources (a job for instance) to be put into a pension scheme

there are bound to be some people that have BTL income and a job where they are putting all their salary into the pension scheme

that the BTL income will have less surplus after the changes will certainly affect some BTLers

Think you are wrong. From April onwards tax free pension contributions will be tapered (based on income) and will take into account all sources of income. Edited by growlers

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https://www.gov.uk/government/publications/summer-budget-2015

It's actually worse than that. £150k income threshold includes employer contributions.

Say you're say...a doctor with 5 properties BTL.

Income from job say £70k. Add 40% pension accrual so effective employment income (for purpose pension taper calc) c. £98k.

Say £20k (post 2017) rental income each property so £100k + employment = £198k for purpose pension annual allowance you are over limit by £48k.

Lose £1 allowance each £2 over £150k so £24k reduction of allowance to £16k.

Pension accrual £28k - £16k. Tax bill £12k * 40% = £4.8k.

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So would it be a bonus to some people with only BTL income though?

Right now they can't put much of their income into a pension as it isn't relevant earnings, under those new rules - where all income can be put into a pension - they can put in up to the limit

if they have the income...

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So would it be a bonus to some people with only BTL income though?

Right now they can't put much of their income into a pension as it isn't relevant earnings, under those new rules - where all income can be put into a pension - they can put in up to the limit

if they have the income...

My understanding is that at present I.e now anyone can put £40k pa into pension tax free.

Suspect many LLs currently put £40k pa into pension. Post April 2016 allowance will depend on income. Post 2017 BTL taxable income will be based on total rental income (less cost).

Many LLs will see their pension allowance tapered all the way down to £10k. Based on figures some of the 118 crowd have posted publicly, this could restrict their tax free pension contributions.

Suspect hardest hit will be those in a dB scheme on an alright wage and with several properties.

You wouldn't want to lose the dB benefits. They are gold dust. Suspect sell properties to get down to £150k.

Edited by growlers

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My understanding is that at present I.e now anyone can put £40k pa into pension tax free.

Suspect many LLs currently put £40k pa into pension. Post April 2016 allowance will depend on income. Post 2017 BTL taxable income will be based on total rental income (less cost).

Many LLs will see their pension allowance tapered all the way down to £10k. Based on figures some of the 118 crowd have posted publicly, this could restrict their tax free pension contributions.

Suspect hardest hit will be those in a dB scheme on an alright wage and with several properties.

You wouldn't want to lose the dB benefits. They are gold dust. Suspect sell properties to get down to £150k.

AIUI most rental income of the type that BTLers have is not relevant income in the current regime

e.g. from http://www.pruadviser.co.uk/content/knowledge/technical-centre/tax_relief_members_contributions/

"It is sometimes easier to think about what is not relevant earnings and this includes pension income, dividends and rental income."

http://www.justanswer.com/uk-tax/1ooma-rental-income-accepted-relevant-earnings-chargeable.html#re.v/266/

and, more definitively, http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05101150.htm

Edited by pipllman

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AIUI most rental income of the type that BTLers have is not relevant income in the current regime

e.g. from http://www.pruadviser.co.uk/content/knowledge/technical-centre/tax_relief_members_contributions/

"It is sometimes easier to think about what is not relevant earnings and this includes pension income, dividends and rental income."

http://www.justanswer.com/uk-tax/1ooma-rental-income-accepted-relevant-earnings-chargeable.html#re.v/266/

and, more definitively, http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05101150.htm

The advise I received yesterday was that post April 2016 this will no longer be the case.

So its even worse for BTLers contributing to pension vs today.

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The advise I received yesterday was that post April 2016 this will no longer be the case.

So its even worse for BTLers contributing to pension vs today.

Depends on the income. If their only income is BTL and it is within the threshold, it is better for them surely (if they want to invest in a pension that is).

If they have a job as well or other income that causes them to bear the brunt of the taper, it is worse

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Depends on the income. If their only income is BTL and it is within the threshold, it is better for them surely (if they want to invest in a pension that is).

If they have a job as well or other income that causes them to bear the brunt of the taper, it is worse

I might be misunderstanding this but my reading was if you are a multiproperty landlord with millions in revenue you would previously have been able to put as much as you liked into your pension.

Come April next year it will be £10k.

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I might be misunderstanding this but my reading was if you are a multiproperty landlord with millions in revenue you would previously have been able to put as much as you liked into your pension.

Come April next year it will be £10k.

I think you are misreading it. Rental income can't go into a pension right now, but can in future (if I am reading that bit correctly).

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I think you are misreading it. Rental income can't go into a pension right now, but can in future (if I am reading that bit correctly).

I think that's right. With the addition that if your rental income is significant (irrespective of how much you actually receive after paying loans) then you might not actually be able to put much in your pension after all.

And if you do have a well-paid job with occupational pension then it might restrict how much you can put in it.

And if it is a non-contributory final-salary type affair then it might be that your rental income removes your ability to contribute to this pension.

[but I can see that HMRC hasn't actually got a definitive statement on this, so it might turn out to be different. I suppose they've got a few months to sort it out.]

Edited by dgul

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I think you are misreading it. Rental income can't go into a pension right now, but can in future (if I am reading that bit correctly).

Apologies, I was mistaken about that. I was reading and writing on my mobile which is never a good idea.

However...I still think I am on to something. I maybe wrong but think there are implications worth noting.

To summarise my thoughts:

  • You are correct that rental income (save some special circumstances - Holiday lettings?) are not eligible for tax relief on pension contributions. It is not defined as 'relevant income'. As per the links you posted. (http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05101150.htm). So if you do pure BTL then 'no worries'. No impact. However, the implications for employees with a BTL is different, interesting and more complicated.
  • The current 2015 / 2016 contribution threshold on 'relevant income' is £40k (reduced from £50k the previous year) (https://www.gov.uk/tax-on-your-private-pension/annual-allowance). This £40k balance covers (1) for Defined Contribution (DC) schemes (the vast majority of people): employee contributions and employer contributions (typical matching contributions but varies by company) (2) For DB schemes (public sector and some remaining private sector final salary schemes) any increase in the benefit you accrual during the year i.e. 'the accrual'. Calculations vary by scheme.
  • Come April 2016, things are changing following the budget, the £40k limit (on 'relevant income' remains but crucially it tapers down to a minimum of £10k at the rate of £1 for every £2 earned above £150k of 'Adjusted Income' (note this term because it is not the same as 'relevant income' (as I understand it)). (https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015).
  • I've not seen anything that suggests that rental income will be treated differently in terms of whether it is 'eligible income' for pension tax relief but my reading of note 62 of the budget statement (see link above), which defines the term 'adjusted income' as follows: ‘Adjusted income’ includes taxable earnings and all pension contributions, but does not include charitable contributions." is - if you pay tax on it then it is included. i.e. BTL income.
  • So, my speculation is, post April 2016 BTL income (i.e. Rental income - mortgage cost - expenses) will increase an employees 'Adjust income' which in turn may (if total 'adjusted income' is in excess of £150k) lead to a tapering of the annual allowance on tax free pension contributions which are applicable to 'relevant income' i.e. employment income. Now as I see things, if this was the end of the story it wouldn't be an issue or worth a post on HPC because BTL is a shit investment and yields not net income. However...
  • Post 2017 (again, as I understand it) income (for tax purposes) on a BTL will equal rental income less expenses (not mortgages any-more). So post 2017, BTLer 'Adjusted income' will shoot up. Their annual allowance will crash and they will have massively reduced tax free pension contribution allowances.

If I am right, what are the implications?

Basically, if you have a combination of the following then expect a chunky tax charges = High income and/or Decent pension and significant BTL income.

As I noted above, the real impact will likely fall on BTLers who are also DB members (final salary and public sector employees) who have big pension accruals each year).

I might be wrong but a summary of thoughts.

Edited by growlers

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Here's a pdf of the Finance Bill 2015-16, if you'd like to check out the changes in more detail. I think the relevant section is Schedule 4, Part 4. I've only skimmed it so I could easily be wrong but I think 'adjusted income' just means the individual's total salary including their pension contributions, plus any contributions to their pension made by their employer.

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Here's a pdf of the Finance Bill 2015-16, if you'd like to check out the changes in more detail. I think the relevant section is Schedule 4, Part 4. I've only skimmed it so I could easily be wrong but I think 'adjusted income' just means the individual's total salary including their pension contributions, plus any contributions to their pension made by their employer.

Thanks Neverwhere, this is what I was after!

Per link:

"The individual’s “adjusted income” for the tax year is—

(a) the individual’s net income for the year (see Step 2 of the calculation in section 23 of ITA 2007), plus

(B) the amount of any relief under section 193(4) or 194(1) deducted at that Step

© the amount of any deductions made from employment income of the individual for the year— (i) under section 193(2), or (ii) under Chapter 2 of Part 5 of ITEPA 2003 in accordance with paragraph 51(2) of Schedule 36, plus

(d) an amount equal to— (i) the total pension input amount calculated in accordance with section 229(1), less (ii) the amount of any contributions paid by or on behalf of the individual during the year under registered pension schemes of which the individual is a member, less

(e) the amount of any lump sum which accrues in the year and in relation to which section 579A of ITEPA 2003 is applied by section 636A(4ZA) of ITEPA 2003."

Reminds me of the Tolly tax books!

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I think you are right in post #13

I will post about it on 118 and see if anyone has thought about it there

http://www.property118.com/government-btl-tax-changes-workarounds/80532/comment-page-2#comment-64748

John, you lucked out! Big style!

BTL and a DB pension?!

Cushty. Real cushty.

I'm not bitter just joking. I think HPC should be a broad church.

Edited by growlers

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I wonder if this pension change was a factor in HMGs figure of only 18% of BTL LLs being affected by the tax changes. It did seem a bit low to me, but if it included allowance for the ability to use pension contributions to ofset the increase in notional income that would probably explain it. I also wonder if the new pension rules will allow, as did the the old rules, unused alllowances from the three previous years to be brought forward.

it's surprising that there is no real discussion on 118, I would have thought for a lot of the lower end BTLers this is the lifeline they have been desperately searching for (although its quite possible I have completely misunderstood the impact of the changes and all of the above is ********).

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http://www.property118.com/government-btl-tax-changes-workarounds/80532/comment-page-2#comment-64748

John, you lucked out! Big style!

BTL and a DB pension?!

Cushty. Real cushty.

I'm not bitter just joking. I think HPC should be a broad church.

I was a member of a DB scheme for 30 months in the nineties. I still am a member I suppose, but no more benefits are accruing. Last valuation the pot was £20k transfer value and might pay a tenner a week if I live long enough...

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I wonder if this pension change was a factor in HMGs figure of only 18% of BTL LLs being affected by the tax changes. It did seem a bit low to me, but if it included allowance for the ability to use pension contributions to ofset the increase in notional income that would probably explain it. I also wonder if the new pension rules will allow, as did the the old rules, unused alllowances from the three previous years to be brought forward.

it's surprising that there is no real discussion on 118, I would have thought for a lot of the lower end BTLers this is the lifeline they have been desperately searching for (although its quite possible I have completely misunderstood the impact of the changes and all of the above is ********).

the property portfolio is their pension...........

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I was a member of a DB scheme for 30 months in the nineties. I still am a member I suppose, but no more benefits are accruing. Last valuation the pot was £20k transfer value and might pay a tenner a week if I live long enough...

http://www.property1...2#comment-64748

I'm interested to see responses to this.

Not sure I agreed with your final point though: "On the plus side, anyone with only BTL income that wants to contribute to a pension scheme, will (if my understanding is correct) be able to from April 2016"

I haven't seen anything in the budget that changes the definition of relevant income.

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the final part is to check if anyone knows if relevant income has been changed to adjusted income in terms of allowing rental income to be put into a pension

I can't yet find a definitive answer to that for the situation post April 2016

If you have one, please link it

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the final part is to check if anyone knows if relevant income has been changed to adjusted income in terms of allowing rental income to be put into a pension

I can't yet find a definitive answer to that for the situation post April 2016

If you have one, please link it

It's 'Relevant Earnings' rather than 'Relevant Income' as per http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05200060.htm

The term 'Relevant Earnings' does not appear in the budget document Neverwhere posted: http://www.publications.parliament.uk/pa/bills/cbill/2015-2016/0057/16057.pdf

'Adjusted income' is a term that drives the changes to the Annual Allowance. I think it is something distinct from 'Relevant earnings'

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I think the premise of this thread is flawed. It's only above £150k that an individuals annual allowance tapers. Someone who has BTL income substantial enough to push them over this level (like 5 properties generating £20k each to use the earlier example) is unlikely to give a monkeys about losing the ability to pay into a pension and get tax relief.

They will say things like "Why would I want to pay into a pension, my property portfolio is my pension!"

And to be honest, at that level they'd be right.

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