Announced in the March Budget were a couple of changes that apply to the tapering of the annual allowance.  Whilst the underlying calculation remains unchanged, the limits within the calculation have been increased, resulting in a higher allowance for individuals who are usually affected by the taper where their total earnings (including employer pension contributions) do not exceed £300,000.

Background

This alteration was brought about by the Government’s need to resolve the ongoing issue faced by senior NHS employees, as the outcome of the present calculation acted as a disincentive for doctors and consultants to work additional hours.  This is an issue which has been covered extensively in the press over the past year.  The alteration made should effectively only leave 2% of doctors/consultants with an issue moving forward.

Addressing this matter given the current pandemic was of course high on the list of priorities for the Government in the Budget.  The taxation implications of implementing this change have not hit the news, presumably this has been lost given the quantum of the Treasury’s intended expenditure during this parliament and the significant expenditure relating to dealing with Covid-19.

The actual changes which took effect from 6 April 2020 are:-

  1. An increase to the ‘threshold income’ level of £90,000, increasing the level to £200,000 gross and
  2. An increase to the ‘adjusted income’ level of £90,000, increasing the level to £240,000 gross

To confirm, the annual allowance remains at £40,000 gross, but the lowest level of the allowance where full tapering takes effect, reduces from £10,000 to £4,000.

What do these changes mean?

In simple terms, where an individuals’ total gross income from all sources, net of gross personal pension contributions, falls below £200,000 gross, then they retain the full annual allowance of £40,000.

Where the calculation produces a figure in exceeds £200,000, then added to this value are the gross pension contributions of both the individual and employer (where applicable).  Where this revised value exceeds £240,000, then their annual allowance starts to be tapered away.  Where the value exceeds £312,000, their annual allowance is reduced to the lowest level of £4,000 gross.

 

Examples

Tax YearTotal Income Net of Personal ContributionsTotal Income Plus All ContributionsAnnual Allowance
2019/20£170,000£200,000£15,000
2020/21£170,000£200,000£40,000
2019/20£250,000£280,000£10,000
2020/21£250,000£280,000£20,000
2019/20£305,000£315,000£10,000
2020/21£305,000£315,000£4,000

In the first two examples, the individual’s (tapered) annual allowance has actually increased whereas under the third example, the tapered annual allowance has decreased to the new lowest level of £4,000.

What Action is Required?

Whether any action is required is dependent on your expected overall earnings together with (any) employer pension contributions in the current tax year.

It is possible, as a direct result of the changes which came into effect on 6 April, for your annual allowance to be different to last tax year even if your overall income and pension contributions remain broadly similar.  Depending on your earnings and possibly pension contributions this tax year, you may benefit from a higher annual allowance, potentially up to £40,000 gross or, a lower annual allowance, now revised down to £4,000 gross.

Any pension contributions which exceed your new annual allowance limit will be subject to an annual allowance charge (this remains unchanged).  Any unused relief may be carried forward into the following three tax years, after which if it is not used, it is lost.

In light of the imminent changes, it would be beneficial to have an understanding of your likely income for the current tax year as soon as possible so that any alterations required can be made accordingly.

My comments above relate purely to changes to the application of the annual allowance and do not take into account:-

  1. any available carry forward relief or
  2. any potential interaction with the lifetime allowance

Summary

In summary, if total income together with all pension contributions are likely to, or potentially will, exceed £300,000 gross and you are making/benefitting from regular pension contributions, then please contact me as soon as possible and before any further pension contributions are made as your pension contributions may need to be reduced.

If total income together with all pension contributions are likely to fall between £150,000 and £300,000 gross, then your annual allowance/tapered annual allowance for the current tax year (assuming similar income and pension contributions to last tax year) are likely to be higher than for last tax year and therefore you are likely to have scope to make higher pension contributions.

Please contact MacIntosh James & Partners should you have any queries or wish to discuss the above in further detail.

Kevin Finlayson

MacIntosh James & Partners

April 2020