With tax year end just around the corner, this is the perfect time to revisit the Annual Allowance and Tapered Annual Allowance rules around pension contributions.

Annual Allowance

The standard annual allowance is currently £40,000. Unused annual allowance from the previous three tax years for an individual can be carried forward and added to the current annual allowance. The normal rules would apply in relation to “net relevant earnings” of the individual in order for the full amount to be contributed in the tax year. Net relevant earnings for pension purposes do not include income from a pension, investment, property rental income or dividends. Tax relief on pension contributions made by an individual into a qualifying pension scheme is limited to the higher of 100% of relevant UK earnings or £3,600 per annum.

If an individual’s pension savings for the tax year exceed the annual allowance, the annual allowance charge is applied to the excess.

Tapered Annual Allowance

The tapering of the annual allowance for high earners has been around since 6 April 2016, but the parameters changed with effect from 6 April 2020.

If you have adjusted your pension funding based on the old rules, pre 6 April 2020, you may now be able to pay more into your pension without a tax charge applying in this tax year.

The taper rules from 6 April 2016 to 5 April 2020

Individuals who had adjusted income greater than £150,000 and threshold income greater than £110,000, had their annual allowance reduced. It was reduced by £1 for every £2 of income above £150,000. The maximum reduction was £30,000, so anyone with income of £210,000 or more had an annual allowance of £10,000.

The taper rules from 6 April 2020

Individuals with adjusted income greater than £240,000 and threshold income greater than £200,000, will have their annual allowance reduced. It will be reduced by £1 for every £2 of income above £240,000. The maximum reduction is £36,000, so anyone with income above £312,000 will have an annual allowance of £4,000.

“Threshold Income” – includes all taxable income such as, salary, bonus, pension income, trading profits, rental income, interest from savings accounts, dividend income etc.

“Adjusted Income” – definition adds in the value of all employer pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions.

Therefore, with the changes to tapered annual allowance income levels:

• You may no longer be affected by the tapered annual allowance;
• You are still impacted by the taper but are entitled to make more tax relievable pension contributions; or
• You will be impacted by the reduced minimum tapered annual allowance of £4,000 rather than £10,000.

To find out more about this please contact your financial planner, or a member of the Johnston Carmichael Wealth team, who would be more than happy to discuss your options with you.

This article is based on our understanding of tax legislation as at 21 January 2021. The benefit of any reliefs or allowances will depend upon your own situation.

Please note: This communication should not be read as a financial advice. While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.