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Markel Tax

12 Mar 2020

Budget 2020: Changes to the pension cap for high earners

The Chancellor’s announcement in yesterday’s Budget that the income threshold for the annual pension allowance  will be raised to £200,000 has not received the fanfare it is due, as it was masked in the Chancellor’s speech as being for the benefit of NHS doctors. It is, in fact, available for the benefit of all high earners, and could result in huge tax savings for many

Current rules
  • The standard annual allowance is currently £40,000 but may then be reduced, or tapered, as an individual’s income rises – to a minimum of £10,000.
  • When calculating the maximum annual pension allowance, two calculations need to be considered. They are ‘threshold income’ and ‘adjusted income’. At present a high earner is someone with threshold income over £110,000 and adjusted income over £150,000.
  • Threshold income is calculated as net income less gross pension contributions which have received basic rate tax relief at source.
  • If an individual has threshold income of above £110,000, they must then look at their ‘adjusted income’, which is calculated as net income add occupational pension contributions and employer pension contributions.
  • If their adjusted income is less than £150,000, no tapering of the annual pension allowance takes place. If it is over £150,000, the allowance is reduced by £1 for every £2 in excess of the threshold down to the minimum of £10,000.
  • This means that an individual with adjusted income in excess of £210,000 will be restricted to the minimum annual pension allowance.
The changes

For 2020/21, both thresholds will now be raised by £90,000 - to £200,000 and £240,000 respectively. While the driver of this change was to encourage NHS doctors to take on more hours without the risk of being restricted by the pension charge as a result, it will benefit all individuals earning less than £200,000, who will now no longer be affected at all by the tapered allowance.

However, to offset some of the cost of this, the minimum annual pension allowance will be reduced from £10,000 to £4,000. The combination of the above measures mean that individuals earning over £300,000 are likely to see a reduction in their annual allowance and those  earning over £312,000 will now have a fully tapered annual pension allowance of only £4,000.

This announcement will be of interest to many high earning clients and should be added to discussion agendas. Many who may have previously only been able to make minimal tax free pension contributions will be able to increase this by as much as 4 times which could result in a significant tax saving.  There will, inevitably, also be losers as the minimum reduced annual allowance has been cut.  It is estimated by HMRC that 250,000 people could be affected in total.
Next article in series

11 Mar 2020

Budget 2020: First thoughts