A surprise increase of £90,000 in respect of both the Threshold and Adjusted Incomes for pensions, and a new lower contribution limit for those with earnings of over £300,000, was delivered in Budget 2020. So what does that mean for you?
The current situation
The maximum contributions that most individuals can pay into their pensions on an annual basis is the lower of earnings or £40,000. This is aside from ‘carry forward’ unused relief from previous years.
However, your allowance is reduced by £1 for every £2 that your ‘adjusted income’ exceeds £150,000. Adjusted income is your total taxable income (earnings, benefits in kind, investment income etc.) plus any employer pension contribution. This means that an individual with adjusted income of £152,000 has an annual allowance of £39,000 and so on. The allowance bottoms out at £10,000 for individuals with income of £210,000 or more.
There is a further test based on ‘threshold income’ – both tests need to be failed for the level of annual allowance to be reduced. So where an individual’s threshold income is £110,000 or less, then their annual allowance will not be reduced, regardless of the level of their ‘adjusted income’. Threshold income is broadly the same as adjusted income except that pension contributions (both those made personally or by the employer) are excluded. This presents an opportunity to do a large one-off contribution to make use of carry forward and the full unrestricted annual allowance for the year of the contribution.
Changes effective from April 2020
Threshold Income will increase from £110,000 to £200,000 and Adjusted Income from £150,000 to £240,000.
This means that if you were to have a total income of £220,000 your current Annual Allowance for pension contributions is £10,000 but this will increase in April to £40,000, which will be tax-relievable at your highest marginal rate.
However, if you have a total taxable income of over £312,000 you will see your Annual Allowance drop from £10,000 to £4,000 with a tapering of the allowance if your income falls between £240,000 and £312,000.
The changes have primarily been introduced to prevent workers within the NHS being penalised, in respect of the rates at which their pensions accrue. However, it also increases the tax planning opportunities for individuals whose income levels fall within the affected brackets and highlights the importance of utilising tax-efficient savings wrappers (such as pensions and ISAs) each year.
Given that it has been less than four years since the current rules were introduced these changes have the potential to further confuse savers. As such it highlights the importance of taking advice from a suitably qualified professional to ensure correct understanding.
Maximum annual contributions to Junior ISAs and Child Trust Funds have also changed, increasing to £9,000, so more opportunities for parents and grandparents to help children accrue tax-efficient savings.
If you would like to discuss your pension options please contact me or a member of our Financial Planning team.