11 March 2020
Patricia Mock, tax director at Deloitte, comments on pensions personal allowance changes:
Tapered annual allowance
“The Chancellor made several announcements relating to pensions. The first was to deal with tapered annual allowances, where those at certain levels of income can suffer overall tax rates of over 100% due to the combined effect of taxes and tapering of the annual allowance.
“The annual allowance for sums that can be invested into pensions is £40,000, but this is tapered for those whose income (including pension contributions) is over £150,000 (“adjusted income”). The allowance is tapered by £1 for every £2 of income over the limit with a minimum tapered allowance of £10,000. However if earnings (after deducting pension contributions) are £110,000 or less (“threshold income”), the taper does not apply. This can mean that when an individual breaches the £110,000 limit the taper provisions immediately apply, giving a cliff edge effect and potential overall tax rates of over 100%.
“Following today’s announcement, from 2020/21 the pension taper will only apply where adjusted income exceeds £240,000 and threshold income exceeds £200,000. Whilst this does not remove the cliff-edge effect it does mean that it will only apply at higher income levels thereby reducing the number of those affected.
“Individuals with adjusted income between £150,000 and £300,000, combined with threshold income exceeding £110,000, will have higher annual allowances as a result of the changes. Whilst this might be seen as a minor change in some respects, its application is important for those affected. This particularly applies to senior doctors, who were singled out by the Chancellor.
“Whilst the changes will generally be seen as a welcome relaxation in tax-free pension savings limits for a population that has seen the benefit eroded in recent years, they will continue to present complexity for those whose earnings fall between £200,000 and £300,000 a year.
“However, this relaxation is somewhat eroded by the Chancellor’s second announcement that the minimum tapered allowance would be reduced to £4,000 from 2020/21, meaning that individuals with adjusted income of over £300,000 or more will have lower annual allowances. The minimum allowance will apply to taxpayers with adjusted income of £312,000 or more.
New lifetime allowance
“This will increase from 6 April 2020 in line with CPI inflation to £1,073,100 (from £1,055,000).
“Finally, the Chancellor announced that the Government is committed to reviewing the mechanics of giving pension relief to ensure that those investing into their pension receive basic rate tax relief even if they pay no tax. At present personal pension contributions receive a basic rate top up, but those paid through net pay arrangements (where relief is given through payroll) will only benefit from this if the individual pays tax. In view of the number of people now making pension contributions through auto-enrolment, this review is welcomed.”
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