In this year’s spring budget, the Chancellor changed pension tax rules for higher earners. The change increases the levels at which earners’ annual allowance (the amount they can save in a pension each year and benefit from tax relief) starts ‘tapering’ down from £40,000. As a result, many high earners will be taken out of the ‘annual allowance trap’ for the first time in many years.
To a large extent, the changes were prompted following lobbying from the British Medical Association (BMA). The BMA has long argued that pensions tapering deterred doctors from accepting extra shifts and the Government was keen to address this issue. However, the change provides an opportunity for all high earners to boost their pension savings and to receive a significant increase in the amount of tax relief.
It’s not all good news, however, as the minimum annual allowance now goes down to £4,000 (from £10,000) for the very highest earners (those whose annual adjusted income is £312,000 or more).
What this means in practice can best be illustrated in the table below 2020/21:
| Adjusted Annual income (ie including pension contributions) | Annual allowance old rules | Annual allowance new rules |
| £150,000 | £40,000 | £40,000 |
| £160,000 | £35,000 | £40,000 |
| £170,000 | £30.000 | £40,000 |
| £180,000 | £25,000 | £40,000 |
| £190,000 | £20,000 | £40,000 |
| £200,000 | £15,000 | £40,000 |
| £210,000 | £10,000 | £40,000 |
| £220,000 | £10,000 | £40,000 |
| £230,000 | £10,000 | £40,000 |
| £240,000 | £10,000 | £40,000 |
| £250,000 | £10,000 | £35,000 |
| £260,000 | £10,000 | £30,000 |
| £270,000 | £10,000 | £25,000 |
| £280,000 | £10,000 | £20,000 |
| £290,000 | £10,000 | £15,000 |
| £300,000 | £10,000 | £10,000 |
| £310,000 | £10,000 | £5,000 |
| £312,000 | £10,000 | £4,000 |
What does this mean for your employees?
As you can see from the above, these changes will only affect employees with an adjusted income in excess of £240,000 per annum. If you have any employees in this bracket, the changes will represent a significant opportunity for them to increase their pensions savings whilst at the same time benefiting from an increase in tax relief.
If you would like further help in determining what this means for your higher earners, or in helping them to decide whether to increase their contributions to your corporate scheme, please do get in touch.
Brunsdon Financial is not responsible for the content of third party web sites.
Any information provided in this article regarding tax treatment or legislation is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs’ practice (August 2020), all of which may be subject to change.
Source 1:
https://www.thisismoney.co.uk/money/pensions/article-8100535/Budget-2020-High-earners-pension-tax-relief-boost-help-doctors.html
Source 2:
http://www.pulsetoday.co.uk/news/chancellor-raises-income-level-at-which-gp-tax-free-pensions-are-tapered/20040304.article#:~:text=The%20Government%20has%20raised%20the,%C2%A3110%2C000%20to%20%C2%A3200%2C000.&text=’For%20those%20on%20the%20very,%C2%A34%2C000%20from%20April%202020.
