With the country in lockdown due to the coronavirus pandemic, it is understandable that some of the changes in the March 2020 Budget, six weeks ago may have been lost or pushed aside to deal with more pressing issues.

However, we are now three weeks into the new tax year, and I think it is worth highlighting an important area which affects over 250,000 individuals (according to HMRC), who are high earners and have previously been impacted by tapered 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 £3600 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.

The rules for the tapered annual allowance apply where an individual’s “adjusted income” for a tax year is above £240,000 (increased from £150,000 in tax year 2019/2020) subject to their threshold income exceeding £200,000 (increased £110,000 in tax year 2019/2020). Both income limits must be exceeded before an individual is affected by the tapered annual allowance.

The annual allowance is reduced by £1 for every £2 of adjusted income above £240,000 subject to a minimum reduced annual allowance of £4,000 (which has reduced from £10,000 in 2019/2020).

“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

If you were affected by the Tapered Annual Allowance in 2019/20 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 April 2020. 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.