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Important UK Budget announcement affecting pension contribution limits

A change to pension contribution limits impacted by the Tapered Annual Allowance designed to reduce the available contribution allowance for higher earners.

small money bags

by
Richard Venner

in Features

16.04.2020

You might not have realised that one Rishi Sunak’s mundane announcements in recent Budget might be of specific interest to you.

This is a change to pension contribution limits impacted by the Tapered Annual Allowance designed to reduce the available contribution allowance for higher earners. 

Since its introduction, the Tapered Annual Allowance has given rise to a number of unintended consequences, not least of which is a significant increase to the tax liabilities incurred by many NHS staff due to working extra shifts.  This was deterring some NHS staff from working the extra hours the NHS needed even before COVID 19 became a factor.

The Budget announcement, effective from 6 April 2020, increases the allowable income before the Tapered Annual Allowance applies, by £90,000.  Unfortunately, the minimum that the allowance can become is now £4,000 rather than £10,000.

The Tapered Annual Allowance is a complicated topic but the general concept requires an understanding of two income definitions:

  • Threshold Income: Total income assessable to tax, from all sources (including new salary sacrifice arrangements started after 8 July 2015) LESS any personal contributions.
  • Adjusted Income: Total income assessable to tax, from all sources but ignoring deductions for personal contributions PLUS the value of an employer’s pension contribution.

If your Threshold Income is less than £200,000 (previously £110,000) for this tax year, then your annual allowance for 2020/21 should be £40,000.

If your Threshold Income is more than £200,000 then a second test must take place against your Adjusted Income.

If your Adjusted Income is between £240,000 and £312,000, then the allowance reduces from £40,000 by £1 for every £2 of Adjusted Income within this band, down to a minimum of £4,000 (previous £10,000). 

The available contribution limit starts to dip under the previous £10,000 minimum when Adjusted Income is over £300,000.  If it is above £312,000, the minimum £4,000 limit applies.

This is a relatively complex topic and should you wish to discuss this before our next scheduled review, I am happy to speak with you to assess whether any immediate action is required. 

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