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 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.

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