In the lead up to the 2020 Budget it had been rumoured that changes to the current Pension Tapering Allowance rules would be announced. However, it was unknown whether this would be a change increasing the tapering thresholds or reducing the thresholds. In a move that Rishi Sunak advised would positively impact hundreds of thousands of higher earners, in particular senior medical professionals, the respective thresholds were increased by £90,000 from 6 April 2020.
Under the previous tapering rules, taxpayers breaching certain thresholds were subject to a reduction in their £40,000 annual pension allowance. This reduction could result in the annual allowance being reduced to £10,000, therefore greatly increasing the possibility of a pension tax charge if contributions exceeding the allowance had been made in the tax year.
Previously taxpayers with “threshold income” (taxable earnings less personal pension contributions) exceeding £110,000 and “adjusted income” (taxable earnings plus employer pension contributions) exceeding £150,000 were subject to the tapering rules. Where both allowances are breached the taxpayer’s annual pension contribution allowance is reduced by £1 for every £2 in excess of £150,000, up to a maximum reduction of £30,000 i.e. reducing the annual allowance to £10,000.
For example: A taxpayer breaching both limits, with total income of £200,000 would see a reduction in their annual allowance by £25,000 (£50,000/2) to £15,000.
Alternatively, a taxpayer breaching both limits with total income of £750,000 would see a reduction in their annual allowance of £30,000 to £10,000.
The change in thresholds from 6 April 2020 has lifted each of these by £90,000. Moving forward, a taxpayer will only be subject to the tapering rules if their “threshold income” is in excess of £200,000 and “adjusted income” is in excess of £240,000. The trade off here is that the annual allowance can now be reduced to a minimum of £4,000, as opposed to the previous minimum of £10,000.
For example: Using the same examples as above, a taxpayer with total income of £200,000 would not be subject to the tapering allowance under the new rules and therefore entitled to an annual allowance of £40,000.
Alternatively, a taxpayer breaching both limits with total income of £750,000 would see a maximum reduction in their annual allowance of £36,000 to £4,000.
In short, this change will simplify the annual pension allowance for a number of higher rate taxpayers in that they will now be entitled to make £40,000 gross pension contributions a year without incurring a tax charge, however for those breaching both thresholds the rules remain fairly complex and still leave those taxpayers open to a pension savings tax charge.
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