The new chancellor of the exchequer Rishi Sunak has revealed plans to raise the point at which tapering of the pension annual allowance kicks in by £90,000 from the new 2020/21 tax year.
What is the pension annual allowance?
The pension annual allowance is the amount that can be saved towards a pension each tax year without a tax charge applying. The standard annual allowance is £40,000 for the 2019/20 tax year and it is due to remain the same for 2020/21. This allowance is reduced if an individual has a threshold income of £110,000 or adjusted income of £150,000 on a £2 for £1 basis. This means that tapering is in full effect for those who have an adjusted income of £210,000.
If an individual goes over their annual allowance, then they are subject to an annual allowance tax charge.
What is the difference?
Threshold income includes all types of income such as salary, rent and dividend income. Broadly speaking, the ‘adjusted income’ is threshold income plus total employer pension contributions less personal pension contributions to pensions.
What is the £90,000 lifeline?
In the budget announcement, Mr Sunak announced that the threshold income and adjusted income will both be raised by £90,000. This means that in the new tax year, the threshold income level will be £200,000 and the adjusted income will be £240,000.
From 6 April 2020, anyone with an income under £200,000 will not be affected by tapering and will have the full £40,000 allowance.
The government estimates that this will resolve around 98% of the consultants’ and 96% of the GP’s problems with taper altogether. It is worth noting that this uplift in the thresholds will benefit all high earners and not just the NHS staff.
What is the minimum annual allowance now?
For those with adjusted incomes in excess of £300,000, the minimum tapered annual allowance will be £4,000 from 6 April 2020.
A worked example
Skye has an income of £190,000 and her employer pays £30,000 into her pension in the 2019/20 tax year.
Her adjusted income for the 2019/20 tax year is £220,000 (£190,000 + £30,000). As this is over £150,000, her annual allowance for her pension is reduced to £10,000. Assuming Skye has no unused allowance to carry forward from the previous three tax years, she will be hit with a tax charge on the “excess” pension contribution which is £20,000 (£30,000 - £10,000).
If Skye’s income and the amount her employer contributes to her pension remains the same in the 2020/21 tax year, then she will have her full £40,000 pension annual allowance because her income is below £200,000.
Skye would even have the scope to add further £10,000 (£40,000 - £30,000) and get 45% tax relief.
How we can help
We would be pleased to help with further advice in this area. If you would like to discuss any of these matters further or you need advice, please contact Andrew Tricker, LFWM Director on 0207 490 7766 or email email@example.com