Tapered Annual Allowance
The Pension Annual Allowance sets the limit on how much you can pay into a pension in a tax year. It is based on your earnings for the year and is capped at £40,000. To add a layer of complication, for higher earners (see below) this allowance could taper away to as little as £4,000 in this tax year, that’s just £333.33 per month.
The Tapered Annual Allowance was introduced in April 2016, so some 4 years ago. Prior to the recent Budget on 11th March 2020, the Tapered Annual Allowance potentially caught higher earners with total taxable Income* in excess of £110,000 (which is referred to as Threshold Income). Checks and balances around personal contributions, employer contributions, exchanged or sacrificed salary into pensions and one or two other more niche rules would all determine how your allowance would be reduced. The rule was, if you were caught by tapering, the standard allowance (of £40,000) would reduce by £1 for every £2 of total taxable income above a certain level (this is £150,000, i.e. the Adjusted Income). At its most extreme, with total taxable income in excess of £210,000 your annual allowance would be restricted to £10,000 in a tax year.
Speculation and comments from leading politicians and pension experts suggested that one of the problems of tapering is that it started to impact upon key workers such as senior doctors, consultants and surgeons. The extent of the problem manifested itself in senior medical staff turning down crucial additional shifts as it meant that pension tax charges offset the payment of working extra hours. So, following the Budget on 11th March 2020, new tapering rules were introduced from 6th April 2020 (the new tax year).
For those with total taxable income below £200,000 the full £40,000 annual pension allowance is available. The Threshold and Adjusted Income limits for the Tapered Annual Allowance purposes have been moved from £110,000 and £150,000 respectively to £200,000 and £240,000 from the 6th April 2020. Further to this, the minimum Annual Allowance for those who are fully tapered (i.e. with a total taxable income of £312,000 or above for the 2020/21 tax year) has been reduced from £10,000 to just £4,000 p.a.
In effect, we now have two sets of tapering rules in place, pre 6th April 2020 and post 6th April 2020. In addition, with total taxable earnings potentially fluctuating each year, there may be years of unused allowances that could be dragged forward and made use of, so called carry forward which is where any unused allowances for the last three years, in addition to the current tax year, can be utilised.
As can be seen from the above it can be a little tricky to get to grips with the varying rules. However, pensions remain an efficient investment product for tax relief, provides the potential for tax free growth and is effectively a savings pot that generally is outside of your estate for inheritance tax planning.
If you feel that you need to discuss your pension planning both with regards to the Tapered Annual Allowance or wider issues, then do contact me or your usual Wingate adviser. A 2020 Tapering Annual Allowance factsheet is available upon request.
*Total taxable income can include – salary, bonus, benefits in kind, dividends, interest from cash savings, self-employed profits (as an example)