Tapered annual pension allowance rises to £200,000

The decision to raise the tapered annual allowance thresholds in last week's Spring Budget delivered a timely boost to high earners.

As of next month, the point at which the tapering of the £40,000 annual pension allowance kicks in increases to £200,000 - up from £110,000.

This means anyone with income below the £200,000 threshold in 2020/21 will be unaffected by the controversial taper.

The issue resulted in senior clinicians or GPs either retiring early, leaving the NHS pension scheme or snubbing overtime to avoid high tax bills.

In December 2018, the number of medical professionals leaving the NHS pension scheme was five times higher than other public pension funds.

How does the taper work?

The taper can gradually reduce the £40,000 annual pension allowance for those on high incomes.

Until 5 April 2020, for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.

The maximum reduction in 2019/20 is £30,000, so individuals with income of more than £210,000 will have an annual pension allowance of £10,000.

However, the taper does not apply to those who have a threshold income in 2019/20 of less than £110,000.

What's changing?

The £40,000 annual pension allowance remains unchanged for 2020/21, but the adjusted income and threshold income thresholds will rise by £90,000.

So, the taper that reduces the annual pension allowance by £1 in every £2 of income will kick in at £200,000 instead of £110,000.
Chancellor Rishi Sunak said raising these thresholds "will take 98% of consultants and 96% of GPs out of the taper altogether."

Sunak also reduced the minimum annual allowance to £4,000 for the very highest earners, those with incomes above £300,000.

What about pension carry forward?

The rules around carrying forward any unused pension allowance - up to £40,000 a year - from the previous three years remain unchanged.

It's possible to make a pension contribution of up to £160,000 and receive tax relief, although any unused allowance can be carried forward.

Assuming you did not maximise pension contributions in those tax years, you can use the carry-forward allowance.

How much you can utilise is the difference between the annual allowance for the carry-forward year and your pension contributions in that year.

Any amount left can be carried forward and added to this year's allowance to help avoid the tapered reduction.

Here's one example of how someone could use the carry-forward method in 2020/21:

Tax year Annual allowance Contributions Unused allowance
2020/21 £40,000* £40,000 £0
2019/20 £40,000* £40,000 £0
2018/19 £40,000* £20,000 £20,000
2017/18 £40,000 £10,000 £30,000
Total allowance to carry forward in 2020/21:   £50,000

*The taper applies for 2020/21, and may have applied in the three previous tax years. Where the taper applied, any available allowance to carry forward is restricted to the unused reduced taper allowance.

Speak to us for tax planning advice.