Changes to the Pension Annual Allowance Taper Threshold
Chancellor Rishi Sunak announced last month that tax relief on pension contributions will be reformed for high earners, including doctors and other senior medical professionals. This welcome news opens additional pension savings tax relief for some as the increase in threshold income and adjusted income figures to £200,000 and £240,000 respectively reduces the previous limitations for higher earners.
The Background
Between tax years 2010/11 and 2011/12 the annual allowance upon which investors could claim tax relief on pension contributions fell from £255,000 to just £50,000, this allowance dropped again in April 2014 to just £40,000, and there it has remained. April 2016 saw the introduction of a tapered annual allowance affecting the tax relief on pension contributions for many more people (effectively further reducing the overall allowance for high earners). One of the groups that were most affected by this rule were NHS doctors, who as a result, started turning down additional work so they would not be caught in the tapered allowance net - triggering major concern for an already under-pressure NHS.
In last month’s Budget announcement, Mr Sunak announced changes to the tapered annual allowance, effectively releasing some of the controls and providing greater incentive for high earners to invest in their pension and save for their retirement.
The Details
The £40,000 annual allowance remains, and represents the maximum amount that you can tax efficiently invest into a pension, but in tax years 2016/17 to 2019/20 anyone with an adjusted income* above £150,000 and threshold income** above £110,000 had their annual allowance tapered, effectively reducing the £40,000 allowance by £1 for every £2 that an individual's income exceeded the £150,000 adjusted income limits. The maximum reduction in those tax years was £30,000 which left those with adjusted income of £210,000 or more with a £10,000 pension annual allowance.
The Chancellor increased these limits (effective from 6th April 2020) which means that the adjusted income limit is now £240,000 (previously £150,000) and the threshold income limit £200,000 (previously £110,000). So, what does that mean? From tax year 2020/21 onwards, many high earners can invest more money tax efficiently into their pensions. For example, if you have adjusted income of £20,000 previously your £40,000 annual allowance would have been tapered to £15,000, but under the new rules, you would still be able to invest the full £40,000 into your pension tax efficiently.
While tapering still exists for those with adjusted income above the £240,000 adjusted income limit, this change benefits all those with adjusted income above £150,000 but below £300,000. Those with adjusted income above £300,000 will have a lower tapered annual allowance than before (and the minimum £4,000 annual allowance applies once adjusted income reaches £312,000).
*Threshold income includes all income that is subject to UK income tax, less any contributions that you make personally to pensions.
**Adjusted income includes all income that is subject to UK income tax plus any pension contributions made by your employer (and your own personal contributions are included in the adjusted income figure – not deducted as they are with threshold income).
If you would like to find out more about these changes or to review your current personal financial / retirement plan, please call us on 02476 388 911. Alternatively, email [email protected]. We are here to help you achieve your goals.