The 2020 Budget increased the scope for many high earners to make a bigger pension contribution in the tax year ending 5 April 2021. The annual allowance income limit was increased to £200,000, significantly reducing the number of people affected by the tapered annual allowance.
The availability of a full £40,000 (gross) annual allowance may provide an opportunity for some high earners to increase their pension savings whilst receiving tax relief.
However, there remain some traps which the unwary could fall into; not least it should be noted that the minimum annual allowance is now only £4,000 (gross) (previously £10,000 gross) for people with threshold income over £200,00 and adjusted income over £312,000.
This is done by reducing the standard £40,000 annual allowance by £1 for every £2 of adjusted income over £240,000. Once you hit adjusted income of £312,000 this allowance is £4,000 only.
Example
So, someone with taxable income is £210,000, all from self-employed earnings, has ‘adjusted income’ of £210,000; they pay the maximum tax relievable contribution into their pension each year.
In 2019/20, the annual allowance – and the maximum contribution – was tapered down to the minimum £10,000. They received tax relief of £4,500 on this contribution.
This year, as the adjusted income is below the £240,000 limit, there will be no tapering, and therefore the maximum that can be paid into the pension with tax relief is £40,000 gross (£32,000 net) – with tax relief of £18,000! This can be reflected in the payment due on 31 January and July 2021 for – subject to no other alterations in income – the payments on account can be reduced to take account of this extra tax relief.
It may even be possible to pay more by making use of the carry forward.
How to counter tapering
By judicious planning, it may be possible to allow people even with adjusted income above £240,000 to keep their full annual allowance in 2020/21. This would be done by making allowable payments, such as Gift Aid payments or pension contributions, to keep their threshold income below £200,000.
Again, unused annual allowances carried forward from the last three tax years can be used, but these amounts may be tapered if your income in the previous three years exceeded the income limits. The calculations can be complicated and you should ensure you take professional advice before making any additional pension payments in 2020/21.
Summary
The increased income limits were introduced primarily for political expediency as NHS doctors are disproportionately affected by the tapered allowance and this was impacting on service levels (and remember that the 2020 Budget took place as Covid-19 was rearing its ugly head!).
However, the revised rules can be of use to other high earners as well as NHS workers.
As ever, you should contact us for further advice and recommendations.