Q. I noticed in the summer budget that tax relief on pension contributions for higher earners was going to be restricted, but didn’t quite understand how. Could you enlighten me please?
A. Tax relief on pension contributions will be reduced from 6 April 2016 for those with adjusted earnings over £150,000 per annum. Adjusted earnings are calculated by adding back any pension contributions paid during the year, so for example if you earned £180,000 during the tax year and your employer paid a further £20,000 as a pension contribution on your behalf, your adjusted earnings would be £200,000. For every £2 of income in excess of £150,000 your annual allowance of £40,000 is reduced by £1. The maximum reduction in the allowance is £30,000. For example; if you have income of £160,000 your allowance would be reduced to £35,000 and if your earnings were £210,000 or above your allowance is reduced to £10,000. As mentioned last week in my response, it is quite possible that further measures may be brought out by the Government to further restrict tax relief, and in particular higher earners.
Q. I have an interest only mortgage on a very competitive rate as it was a tracker which reduced substantially when the base rate reduced some years ago. I now want to build an extension and get a further advance, but the lender wants me to change the whole mortgage to a repayment basis. Surely there must be some way to borrow the additional money without changing the whole mortgage?
A. This is quite a common situation. Lenders now insist that the vast majority of new mortgages are on a repayment basis, where the monthly payment includes both an interest element and pays back part of the capital. This ensures that the mortgage is repaid by the end of the term. When you get a further advance, it is now common practice for the lender to insist that the existing interest only loan is reviewed, partly because it is not very profitable for them. Other lenders are also unlikely to consider a “second charge” mortgage where they are after the original lender in priority if things go wrong. Depending on how much you are borrowing, and your financial situation, you may find it is better to consider a personal loan, which you could repay over a shorter period of time. Alternatively, you could switch to the repayment basis, but bearing in mind this will cost more initially. If you do stick with the interest only mortgage, remember that you need to have a plan to ensure the funds are in place at the end of the term in order to repay the capital borrowed.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
