With everything that’s been going on in 2020, you might have missed some important changes to the pensions annual allowance introduced this Spring. Depending on your income, the new rules may mean you come out better off, but equally, you may find you’re likely to lose out. Here’s a recap of the new rules so you can see how it will affect you.
Your annual allowance
First things first. The pensions annual allowance is how much you can pay into your pensions during the course of a year. It’s currently set at £40,000, but if you’re a high earner, this may be reduced thanks to ‘tapering’. It’s really important to know what your own annual allowance is – if you go over, you could be hit with a nasty (and unnecessary) income tax charge.
Let’s talk about tapering
Your annual allowance is reduced or ‘tapered’ if you earn over a certain threshold. Tapering was introduced by the government in April 2016 and meant the annual allowance for high earners could be anything from £10,000 to £40,000 depending on their circumstances. That didn’t go down well with some groups, particularly Senior NHS Consultants and Doctors. It hit the headlines when many were forced to turn down overtime to avoid extra tax penalties, resulting in increased pressure on the health service.
Fast-forward to April 2020 and the Chancellor has changed the way tapering works to make it fairer for those affected. That’s obviously good news, but as with any system, there are still winners and losers.
Now, if your ‘threshold income’ is less than £200,000, you’ll be able to take advantage of the full £40,000 annual allowance. Threshold income is your annual income before tax, less any personal pension contributions, but ignoring any employer contributions. Previously, this was set at earnings of under £110,000, so that increase will mean more people can stay under the government’s high earners classification and come out winning.
If your ‘threshold’ income goes over £200,000, then you need to check if your ‘adjusted income’ is under £240,000 (an increase from the £150,000 that was in place). Adjusted income is everything that you’re taxed on, including dividends, savings interest and rental income, plus the value of your own and any employer pension contributions. Stay under this limit and you may still be entitled to the whole £40,000 allowance.
If your ‘adjusted income’ goes over £240,000, then your annual allowance will be tapered or reduced by £1 for every £2 that you go over the £240,000 threshold – up to a maximum of £36,000. So for someone with an adjusted income of £312,000, you’ll be looking at an annual allowance of only £4,000 rather than the usual £40,000. That’s quite a difference. And one that will see many lose out.
What you should do now
The most important thing you can do right now, is check whether you’ll be a winner or loser under these new changes. It’s not straightforward we know, so give us a call. We’ll make sure you’re getting it right now – and not setting yourself up for a nasty shock later.
Talk to us, we’d love to help you.