Pension Contributions – Changes to the Annual Allowance for 2020/21

Are you considering topping up your pension savings before 5 April 2021? The Government introduced some generally positive changes for the 2020/21 tax year which might assist in the decision making process for higher earners.

Over the last few years high earners were potentially subject to pension savings tax charges if their pension savings for the tax year exceeded their pension annual allowance.

On 6 April 2016 the UK Government introduced a tapering of the annual pension savings allowance for high earners. In a worst case scenario, the annual allowance could be reduced from £40,000 to £10,000.

Up to 5 April 2020 the reduced annual allowance applied to individuals with ‘threshold’ income in excess of £110,000 and ‘adjusted’ income in excess of £150,000.  Broadly adjusted income includes all pension contributions (including any employer contributions), while threshold income excludes pension contributions.

In situations where both limits are exceeded, the £40,000 annual allowance is reduced by £1 for every £2 that adjusted income exceeds £150,000, subject to a minimum allowance of £10,000.  Any contributions in excess of an individual’s annual allowance would then potentially be subject to a tax charge if they were not covered by any unused allowances from previous 3 tax years.

The tapering rules caused uproar, particularly amongst medical consultants, who were finding themselves in the position where their earnings for any extra shifts were being decimated by tax charges.

On 6 April 2020 the ‘threshold’ income limit was increased to £200,000 and the ‘adjusted’ limit to £240,000, removing the pension tax charge for the vast majority of individuals. Taxpayers with income in excess of these limits will now be able to earn up to £312,000 (previously £210,000) before the full taper applies.

However, the minimum annual allowance has been decreased from £10,000 to £4,000, which might result in higher pension tax charges in some cases.

Higher earners wishing to ‘top up’ their pension prior to 6 April 2021 should make sure they have scope to do so to avoid any nasty surprises upon completion of their Self-Assessment Tax Return. If certain conditions are met a Scheme Pays application can be made which enable the pension fund to pay the pension tax charge.  We can assist with these calculations and Scheme Pays applications.

Finally, the ‘Lifetime Allowance’ for pensions has also increased in line with inflation to £1,073,100 from 6 April 2020.