Budget 2020: Annual Allowance Pensions Changes – A Silver Lining or a Sting in the Tail?

The recent budget saw Chancellor Rishi Sunak announce some welcome changes to the rules for tapering of the Pension Annual Allowance (AA), particularly for those in certain income brackets, where they previously faced severe restrictions on what they could save…

Blog17th Mar 2020

By Lynn Gracie

The recent budget saw Chancellor Rishi Sunak announce some welcome changes to the rules for tapering of the Pension Annual Allowance (AA), particularly for those in certain income brackets, where they previously faced severe restrictions on what they could save into their pensions without facing a tax charge.

Background

Most pension savers can get tax relief on up to £40,000 of pension contribution in a year, but from 2016, the £40,000 limit had instead gradually reduced for high earners, tapering down by £1 for every £2 in excess of the £150,000 ‘adjusted income’ limit, to a minimum of £10,000. If pension contributions exceeded the tapered AA, then an income tax charge would be due.

The impact of these complex rules has been keenly felt in the NHS, where many Doctors can have high earnings and build up significant pension benefits. This has resulted in some Doctors receiving high tax bills or seeing future pension benefits reduced, which in turn has made some reluctant to take on additional overtime, or even consider early retirement.

New Income Limits

There are two income measurements to consider before this pension tapering starts to apply, and the changes announced in the budget provided a significant increase to these income limits:

Pre 5 April 2020 Post 6 April 2020
Threshold income

(gross income less personal pension contributions)

£110,000 £200,000
Adjusted Income

(gross income plus employer pension contributions)

£150,000 £240,000

 

These changes will allow many more individuals to contribute to pensions at a much higher level.  We understand that some 98% of NHS consultants and 96% of GP’s will now no longer be affected by the tapering adjustment, which is a welcome announcement, providing much needed support to an already stretched NHS workforce when facing the Coronavirus crisis.

 

Income in Excess of £300,000

The sting in the tail comes to those who’s income exceeds £300,000. The government have confirmed in those cases that the current minimum AA of £10,000 will in those cases, be tapered down still further to £4,000.  Forward planning must be undertaken by these individuals to manage the contributions to their pensions to avoid excess tax charges at the additional rate of 45% / 46% depending on whether the individual is a UK or Scottish tax payer, and high paid employees should consider if they need to ‘opt out’ of their workplace pensions, given the compulsory minimum employer/employee combined contribution of 8% will likely exceed the tapered annual allowances available.

The effect of the new tapered AA can be seen in the table below:

Adjusted Income Pre 5 April 2020 Post 6 April 2020
£240,000 £10,000 £40,000
£250,000 £10,000 £35,000
£260,000 £10,000 £30,000
£270,000 £10,000 £25,000
£280,000 £10,000 £20,000
£290,000 £10,000 £15,000
£300,000 £10,000 £10,000
£310,000 £10,000 £5,000
£320,000 £10,000 £4,000

 

Lifetime Allowance (LA)

The LA is the maximum amount that a person can save in tax-advantaged pension schemes. The value of benefits is measured against the LA when benefits are first taken from a pension, and also on some other occasions, including the individual’s 75th birthday. The LA will increase in line with inflation from £1,055,000 to £1,073,100 from 6 April 2020.

If you are affected by any of the above or would like any further information, please contact Lynn Gracie, Carol Edwards or your usual AAB contact.

By Lynn Gracie

Sign up to updates

  1. Blog23rd May 2023

    Image of Portugal city

    Portugal’s Golden Visa – it’s not over yet.

    In October 2012 the Golden Visa Programme was launched. The main objective of the programme? To attract international capital into the country. Following the economic crisis of 2008 there was a real need for the programme. It has since become…

    By Lynn Gracie

    View more
  2. Blog17th Jan 2023

    Lynn Gracie, Private Client International Tax Director, Professional headshot

    The hidden tax pitfalls of cryptocurrency

    If cryptocurrencies are not the most popular form of investment, they are almost certainly the most talked about. And no wonder – it’s thrilling stuff. Cryptocurrency is relatively new and mysterious to many people. A tantalising balance of high risk…

    By Lynn Gracie

    View more
  3. Blog28th Nov 2022

    Lynn Gracie, Private Client International Tax Director, Professional headshot

    HMRC gain yet more visibility to Digital & Offshore Assets

    It is well documented that global tax jurisdictions are struggling to keep tabs on the digital economy. It is therefore unsurprising that countries are keen to work together to help them pin down individuals and businesses who are not reporting…

    By Lynn Gracie

    View more
  4. Blog7th Nov 2022

    Young professionals in an office

    “Keeping up”… with Crypto

    With an increasing number of younger people trying their hand at crypto investments, the recent US Securities and Exchange Commission (SEC) fine, suffered by social media influencer, Kim Kardashian, should probably come as a warning to everyone. Kim was ordered…

    By Lynn Gracie

    View more

Share this page