Pension annual allowance… are you a winner or loser?
This week we’re talking pension annual allowances and the changes that were introduced at the beginning of the tax year.
There are two camps here – those who’ve benefitted from the changes and those that haven’t. We’ll look at both but first some context…
What is the annual allowance?
The pension annual allowance is the annual limit you can pay (or accrue) into pensions. If you go over the annual limit you could be hit with an income tax charge.
A bit of background
In April 2016 the government introduced something called tapering. This affected the standard annual allowance for high earners so, depending on your circumstances, if you were tapered your annual limit could fall anywhere between £10,000 and £40,000.
NHS doctors were one of the highly affected groups – some started turning down additional work to avoid being caught by the charge. This put additional pressure on the NHS and the government had to take action.
Fast-forward to 2020
In April 2020, the government made some important changes that determine whether you’re affected by tapering. This is where the two camps come in…
The winners – your annual allowance has increased
If your threshold income is £200,000 or less, you’ll have the full annual allowance of £40,000 per year – this has increased from the previous threshold income of £110,000.
Threshold income – broadly this is your total taxable income for the year, less your government reliefs.
Where your threshold income breaches £200,000, another test is carried out on your ‘adjusted income’.
Adjusted income – broadly speaking this is your total income, PLUS the amount of your employer and personal pension contributions – this increased from £150,000 to £240,000.
If your adjusted income is £240,000 or less, then your annual allowance could be as much as the full £40,000.
The calculations surrounding this are complicated (it’s not something we suggest you try to do at home – contact us if you need help!)
The losers – your annual allowance has decreased
Those people with adjusted incomes of between £240,000 and £312,000 will have their allowance tapered.
If your adjusted income falls in this bracket your annual allowance is reduced by £1 for every £2 you’re over the limit.
If your adjusted income is over £312,000 then you’ll only have an annual allowance of £4,000, as the chart below shows. If, following the 2016 changes, you’d previously set your monthly contributions to total £10,000 annually, you may want to double check you’re not going to go over the £4,000 limit.
What does this mean for you?
It all depends on your earnings.
It’s important to know where you stand so you can make the most of your allowance or ensure your pension contributions aren’t breaching the thresholds.
This can all feel a little confusing and, as we said earlier, the calculations aren’t straightforward. If you’d like to have a chat about this or need some support, get in touch.
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.