Pension Tax Relief – Changes to the Tapered Annual Allowance

March 24, 2020

On the 11th March, Rishi Sunak delivered his first Budget, and it came across as a very generous one. What with all the other stuff going on at the moment, you might have missed some details of changes announced.

Something which caught our eye is the change to the threshold for high earners, who may be affected by the controversial tapered annual pension allowance. We’ll take a look at what has changed and who may be affected.

What is the current pension allowance and tapering rules?

The tapered annual allowance rule currently affects around 250,000 people. Just in case you didn’t already know, those who have threshold income up to £110,000 a year have an annual allowance of £40,000 for that tax year. If threshold income is over £110,000, adjusted income must be worked out – adjusted income is threshold income plus pension contributions (own and employer). If adjusted income is over £150,000, the tapered annual allowance applies.

If you earn above the current threshold and adjusted income figures, your annual pension allowance is reduced on a tapered scale. For every £2 above the £150,000 Adjusted Income figure, your annual allowance reduces by £1.

The new pension tax relief allowance

As of Monday 6th April, these income limits are going to be raised to £200,000 for threshold income and £240,000 for adjusted income) before the tapered annual allowance takes effect. This is great news for high earners. It will lift most people, other than those with really high net worth, out of the so-called “taper trap”.

In addition, the minimum annual allowance for those who are fully tapered will reduce from £10,000 to £4,000, affecting those earning over £300,000 of adjusted income.

The reason behind the change 

The changes to the system are to tackle issues within the NHS Defined Benefits scheme. Some doctors are capping their working hours to avoid the loss in pension savings they could encounter. This is especially relevant in the current climate where the coronavirus is putting extra strain on NHS workers.

The new limit will allow those who have adjusted income below £300,000, who may have previously capped their pension contributions to avoid the taper, to be able to make additional contributions. It is thought that many of the 250,000 who are currently affected by the tapering rules may cease to be tapered at all following the announced rule change.

Lifetime allowance is also set to increase

In addition to the change in the tapered allowance threshold, the pension lifetime allowance is also set to increase. The amount will rise from £1,055,000 to £1,073,100 for the 2020/21 tax year. Which is a nice healthy amount for living a very comfortable retirement!

Don’t forget, we are here if you need us! If you would like to know whether these changes may affect you and your pension, get in touch. We will be happy to discuss your situation with you.