UK Pension Changes
With all that has happened over the past few months, it’s all too easy to miss a few key changes to the ever-changing UK pension landscape.
As we all know, the government has enjoyed changing the rules regarding UK pensions over the last few years, and this year was no different. It is important to stay on top of the latest developments to ensure you maximise the potential benefits whilst avoiding falling foul of the changing rules. I wanted to take this opportunity to update and remind everyone about the latest rules for UK pension contributions.
At the 2020 Budget, the Government announced increases to the threshold income and adjusted income limits used to calculate one’s tapered annual allowance.
From 6 April 2020, the adjusted income limit rose to £240,000 (increased from £150,000) and the threshold income limit rose to £200,000 (increased from £110,000).
The Chancellor also lowered the minimum reduced annual allowance that an individual can have under the tapering rules from £10,000 to £4,000.
What is ‘threshold income’?
Threshold income is all of one’s earnings, not just salary. However, it is net of all pension contributions that one pays personally to UK registered pension schemes.
Foreign earnings do not count towards threshold income as they are not taxed in the UK.
What is ‘adjusted income’?
Adjusted income is all of one’s earnings which are subject to UK Income Tax, including all pension contributions paid personally and by one’s employer.
The difference between ‘threshold income’ and ‘adjusted income’ is that the former excludes pension contributions but the latter includes all pension contributions.
The annual allowance is the maximum amount an individual can save in their pension scheme each year with the benefit of tax relief.
For the 2020/21 tax year the annual allowance is £40,000 but, for those with a higher income, the annual allowance may be lower than £40,000.
This tapering of the annual allowance is applied depending on an individual’s level of income within the tax year and applies to all pension savings that are made by them or on their behalf.
From 6 April 2020, an individual will have a reduced (‘tapered’) annual allowance if:
- their threshold income is over £200,000 (this was previously £110,000); and
- their adjusted income is over £240,000 (this was previously £150,000).
If an individual’s threshold income is £200,000 or less, regardless of adjusted income, the tapered annual allowance will not be applicable.
In instances where one is subject to the tapered annual allowance, for every £2 the individual’s adjusted income goes over £240,000, the annual allowance for that year reduces by £1.
From 6 April 2020 the minimum that this can reduce to is a tapered annual allowance of £4,000.
Here are some worked examples to put things in context:
For the 2020/21 tax year, an individual with an adjusted income of £300,000 will exceed the adjusted income limit by £60,000. The individual’s annual allowance would be reduced by half of this – so by £30,000 – leaving them with a tapered annual allowance of £10,000, which is the standard annual allowance of £40,000 less the £30,000 reduction under the tapering rules.
For the 2020/21 tax year, another individual earns £330,000. Their income exceeds the adjusted income limit by £90,000. Their annual allowance should be reduced by £45,000, which is the standard annual allowance of £40,000 less the £45,000 reduction under the tapering rules.
However, the minimum that the annual allowance can reduce to under the tapered annual allowance rules is £4,000, so this individual will have a tapered annual allowance of £4,000.
Having said this, you must not forget that you can also carry forward any unused annual allowance from the previous three tax years and use this.
Your available annual allowance is your reduced (or tapered) annual allowance plus any unused allowance from the previous three tax years.
If you have any questions at all on how this applies to you, please get in touch with your MASECO Wealth Manager.
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