For many higher earners, changes to the pension annual allowance rules mean that they are now entitled to make increased contributions to their pension scheme.
The annual allowance is the limit that an individual can contribute to a pension scheme, while still receiving tax relief. It is based on your level of your earnings (for personal contributions) or the year but is capped at £40,000.
Tapered Annual Allowance
The tapered allowance was introduced in April 2016 to further restrict the annual allowance for higher earners. Up until April 2020 your annual allowance was reduced by £1 for every £2 that your adjusted income exceeded £150,000.
The maximum reduction was £30,000 so that the annual allowance was reduced to £10,000 if your adjusted income exceeded £210,000. Your adjusted income is your total income for the year plus any employer pension contributions. Up until April 2020 you were not affected by the tapered allowance if your threshold income was in excess of £110,000.
Your threshold income is your total income, less certain deductions including pension contribution and gift aid donations.
Changes to the tapered allowance thresholds from 6 April 2020 have meant that many taxpayers have been taken out the tapered annual allowance altogether or its impact has been reduced.
From 6 April 2020 the annual allowance is reduced by £1 for every £2 your adjusted income exceeds £240,000. The maximum reduction is now £36,000thus reducing the annual allowance to £4,000 for those whose adjusted income is £312,000 or more.
Utilising Earlier Year’s Unused Relief
It is also possible to utilise any unused annual allowance from the previous three tax years.
Money Purchase Annual Allowance
Please be aware that if you have already taken pension benefits from a money purchase scheme in excess of the 25% tax free lump sum that the allowances outlined above will not apply to you. In this scenario, you are restricted to the Money Purchase Annual Allowance of £4,000 and you are not able to utilise any unused relief from the previous three years.
We can help you with all aspects of pensions. Please contact us for further advice and assistance.
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