Tapered Annual Allowance Changes since 6 April 2020 – For Better or Worse?
Some History
The “annual allowance” provides a limit on the total amount that can be paid into a pension within the tax year without a tax charge becoming applicable.
The standard annual allowance is currently £40,000.
The “tapered annual allowance” was introduced in April 2016 as a measure to restrict pensions tax relief for high earners, with 2 tests being applied:
If threshold income was in excess of £110,000 then adjusted income was reviewed.
If adjusted Income was above £150,000 then the standard annual allowance was tapered away by £1 for every £2 in excess of this, down to a minimum (or “fully tapered”) annual allowance of £10,000 for those with adjusted income of £210,000 or above.
There are a lot of new and interesting terms in this analysis. Both threshold income and adjusted income include all taxable income for the year, but treat pension contributions differently. Broadly, these are ignored for threshold income and included for adjusted income.
Naturally these things are never as simple as they could (should) be, and there are a few exceptions and adjustments to the above, but we won’t go into these for the purposes of this update!
So, What’s New?
Well, there’s some good news and some bad news.
For the 2020/21 tax year, both threshold income and adjusted income limits are to be increased by £90,000 – bringing them to £200,000 and £240,000 respectively.
This is very good news for those with adjusted income of £150,000 to £240,000 as they now fall outside of the tapering regime completely.
Interestingly, this move was largely made to ensure that the majority of NHS workers (around 98% of consultants and 96% of GPs) fell out of scope under the new rules.
There’s some bad news, however, for those who are still affected.
The maximum extent of the taper has been increased for 2020/21, with the fully tapered annual allowance now reduced to £4,000. This means that workers with over £310,000 of adjusted income are now worse off than they were before when it comes to their pension funding.
So, once all is said and done, are you a winner or a loser? Or are you simply not sure?
If you want any help establishing your annual allowance for the tax year, please do not hesitate to contact us and we will be happy to help you!