In a measure firmly aimed at encouraging NHS doctors to work more, the government announced changes to the unpopular tapered annual allowance regime for pensions.
The changes to pensions annual allowance rules will impact an estimated 250,000 individuals who are currently affected by the tapered annual allowance.
Although no changes were made to the rate of tax relief taxpayers can claim when making pension contributions, further changes have been made the Annual Allowance regime. This is the annual amount an individual can save in tax-relieved annual pension savings (including employer contributions). This is known as the annual allowance.
The standard annual allowance is currently £40,000. Unused annual allowance from the three previous tax years for the individual can be carried forward and added to the current annual allowance. If the individuals’ pension savings for the tax year exceed this total, the annual allowance income tax charge is applied to the excess.
The rules for the tapered annual allowance came into force on 6 April 2016 and have proved very unpopular, resulting in large tax charges for some people contributing to their pension fund, in particularly those contributing to final salary or defined benefit pension schemes. The tapered annual allowance rules currently apply to individuals with ‘adjusted income’ for a tax year above £150,000 subject to their threshold income exceeding £110,000.
The annual allowance is reduced by £1 for every £2 of adjusted income above £150,000, subject to a minimum reduced annual allowance of £10,000. For those contributing to defined benefit pension schemes, the current regime has resulted in very significant tax liabilities and act as a disincentive to work or continue contributing to a pension scheme.
The government launched a consultation into the impact of these rules as they impacted on the NHS Pension Scheme in 2019 and so it was expected that some changes were to be announced in the Budget.
The government has now announced that from 6 April 2020, the threshold income will be increased from £110,000 to £200,000 and the adjusted income from £150,000 to £240,000.
The standard annual allowance is to remain at £40,000 with a new, minimum tapered annual allowance of £4,000 from 6 April 2020 (a reduction from the current minimum tapered annual allowance of £10,000).
This also means that the annual allowance will not start to be tapered until adjusted income exceeds £240,000 and reaches the minimum tapered annual allowance of £4,000 once adjusted income reaches £312,000 a year.
The changes mean that the government expect only the highest earners to be impacted by the tapered annual allowance rules but there will obviously continue to be a disincentive to contribute to a pension scheme if you are subject to the minimum tapered annual allowance of £4,000 in 2020/21 onwards. For a taxpayer who suffers the new minimum tapered annual allowance of £4,000, they will see an increase in their pensions tax liability of £2,700 a year from 2020/21.
For more information on this, and to see if you need to make changes to your pension savings, contact your usual M+A Partners adviser who can help you on this.
Lifetime Allowance Up-rating
The Lifetime Allowance is to be increased by CPI to £1,073,100 from 6 April 2020.