In recent months, the issue of the pensions Tapered Annual Allowance has never been far from the headlines. As senior NHS staff cut hours and refused additional shifts in order to avoid a significant tax bill, the government announced an urgent review into the issue in late 2019.
During his Budget speech on 11 March 2020, the Chancellor announced the results of that review, and the changes that will be made for the 2020/21 tax year. Of course, it hasn’t just been NHS staff that have been impacted by the taper, so here’s your summary of the changes.
Increases in the thresholds that determine the taper
During his Budget speech, Rishi Sunak announced that, from 6 April 2020, there will be an increase in the two thresholds that determine whether you are affected by the taper of the annual pension savings allowance, and by how much.
These changes will affect both individuals and employers. The rules are complicated so here’s a look at who these changes will impact – both positively and negatively.
The current position for individuals
In the 2019/20 tax year, if your ‘threshold income’ (broadly, all income including investment income, less certain deductions) is less than £110,000 then no taper applies. You can contribute to the annual maximum of £40,000 gross (or 100% of your earned income) and receive tax relief.
Where this threshold is exceeded and ‘adjusted income’ (‘threshold income’ plus all pension contributions) is over £150,000, then the Annual Allowance is reduced by £1 for every £2 of ‘adjusted income’ over £150,000. This means your Annual Allowance will be reduced, to a minimum of £10,000 per tax year.
- Defined Contribution schemes – all payments made to registered pension schemes by individuals, employers and those made by salary sacrifice must be considered.
- Defined benefit schemes (or ‘final salary’ schemes) – the relevant amount to consider is broadly the increase in value of the policy.
Unused relief from the previous three tax years can be utilised once the maximum allowance for the current year has been paid. However, an Annual Allowance charge arises at your marginal rate of tax once these limits have been exceeded.
What is changing for individuals?
The Chancellor has announced that, from 6 April 2020, the ‘threshold income’ limit will increase to £200,000 and the ‘adjusted income’ limit to £240,000.
However, at the same time, the Annual Allowance will be restricted to a minimum of £4,000 per tax year. This means that individuals with ‘adjusted income’ over £312,000 will only be able to contribute £4,000 to their pension and benefit from tax relief.
What should individuals be thinking about?
- Individuals with ‘adjusted income’ between £150,000 and £240,000 could contribute up to £40,000 gross (i.e. £32,000 net) from 6 April 2020. You may be able to consider increasing your regular contributions or make one-off payments.
- Individuals with ‘adjusted income’ between £240,000 and £300,000 will still be subject to the taper but may be able to contribute more to their pension scheme than at present. You may be able to consider increasing your contributions, although it may be sensible to wait until towards the end of the tax year when you have a better idea of what your final income level will be.
- Individuals with ‘adjusted income’ over £300,000, will be subject to more tapering than before. If you have ‘adjusted income’ of over £312,000 the full taper will apply, and you can only contribute £4,000 gross and benefit from tax relief. You should review existing commitments to ensure an Annual Allowance charge does not arise.
What employers need to know
The rules remain complicated. It is possible that individuals who are affected by these changes might look to their employers to provide information and guidance over and above that provided by the pension administrator.
Many employers found that this was the case when the taper rules were introduced in 2016. Some found the Tapered Annual Allowance hard to understand, and many employers provided useful guidance on the matter.
Employers who offer alternatives to pensions to employees who are currently affected by the taper (for example, a cash top-up) should review those policies and consider whether they should be updated to take account of what the changes mean for their staff.
A change to the Lifetime Allowance
From 6 April 2020, the Lifetime Allowance will increase in line with the Consumer Prices Index to £1,073,100.
Further help if you need it
Calculating the relevant ‘threshold’ and ‘adjusted’ income amounts can be complex.
If you need help with these calculations and also any unused relief for earlier years, please speak to your usual HFMC contact. Where you face an Annual Allowance charge, we can advise you on the tax implications and the options for settling this charge.
We can also help employers and trustees determine the policy and operational impacts of the Budget changes, as well as communicate the practical implications and potential courses of action to your affected staff.