Spring 2020 budget – Tapered Annual Allowance changes

There had been a lot of speculation about the removal of higher rate tax relief for high earners in the budget but that was not even mentioned. Indeed there was some welcome news for pension funding for high earners as many will no longer be subject to the pension tapered annual allowance. There are no changes to the standard Annual Allowance, which remains at £40,000. However for those whose earnings  exceed the new higher thresholds, the minimum level the annual allowance can be tapered down to is reducing from £10,000 to £4,000. So those with income above £312,000 will only be entitled to a £4,000 annual allowance from next year. The lifetime allowance has increased to £1,073,100.

Since the 2016/17 tax years, high earning individuals could have had their annual allowance reduced depending on their total level of income and employer contributions within the tax year. The standard £40,000 annual allowance is reduced by £1 for every £2 of adjusted income an individual has over their ‘adjusted income’ (which was £150,000).

The budget has introduced higher tapered annual allowance thresholds which have been raised by £90,000 from 6 April 2020:

The ‘adjusted income’ is the individual’s total income from all sources (before tax and ignoring deductions for individual pension contributions) plus the value of any employer pension contributions has been increased to £240,000.

The ‘threshold income’ is the total income less any payments made personally by an individual into their pension in the tax year. Employer payments don’t count towards threshold income unless they’re in respect of a ‘new’ (post 2015) salary sacrifice arrangement, this has been increased to £200,000. The full £40,000 annual allowance is retained if ‘threshold income’ is not breached.

This increase will help reduce the number of high earners affected by the tapered annual allowance (see below). However, those with income over £300,000 could see their tapered annual allowance reduced to £4,000

For those still caught, taper will take affect by reducing the annual allowance by £1 for every £2 of adjusted income over £240,000.

Adjusted income                     Annual allowance

on new rules      on old rules

£150,000                            £40,000               £40,000

£160,000                            £40,000               £35,000

£170,000                            £40,000               £30,000

£180,000                            £40,000               £25,000

£190,000                            £40,000               £20,000

£200,000                            £40,000               £15,000

£210,000                            £40,000               £10,000

£220,000                            £40,000               £10,000

£230,000                            £40,000               £10,000

£240,000                            £40,000               £10,000

£250,000                            £35,000               £10,000

£260,000                            £30,000               £10,000

£270,000                            £25,000               £10,000

£280,000                            £20,000               £10,000

£290,000                            £15,000               £10,000

£300,000                            £10,000               £10,000

£310,000                            £5,000                  £10,000

£312,000                            £4,000                  £10,000

The Government is also reviewing options to ensure that low earners who are members of pension schemes which give tax relief under the ‘net pay arrangement’ are treated fairly. Under these schemes, the employer deducts an employee’s contribution from gross pay. This means that those with net pay under the personal allowance (after deducting their contribution) currently lose out on tax relief. The aim is to put these individuals on a level playing field with similar employees who are members of a ‘relief at source’ scheme and get 20% basic rate relief on all of their contributions such as Group Personal Pension members.

Coronavirus or COVID-19 and Employee Benefits

Coronavirus or COVID-19 has not yet been declared a global pandemic but given the continued spread of the disease it seems likely it may only be a matter of time until the World Health Organisation takes that step. I thought it was worth taking the time to consider what impact Coronavirus could have on your Employee Benefits, especially if a significant outbreak were to occur in the UK and some of the worst fears which have been discussed by experts, such as two-thirds of the population catching the virus and 1-2% of those infected dying, were to happen.

Pensions and investments; The fear of the economic effects of the virus is already causing falls in worldwide stockmarkets and this could impact on your employees’ pension fund investments. This week (ending 28 Feb 2020) has the potential to be the worst week in stockmarkets since the financial crisis in 2008. These falls, although significant, do follow some very strong growth in investment markets over recent years. If the spread of the virus were to continue and reach the worst forecasts there is no doubt the global economic impact could be significant. Members may wish to review their investment decisions and pension fund choices.

Your business’ sickness policies should be reviewed and clarified, when does your sick pay kick in? Would you continue pay or sick pay for those employees who decide, or you advise, to self-isolate due to contact with infected individuals or due to countries they have visited?

It is unlikely that insurance policies such as group income protection or group critical illness will offer any cover for such circumstances. For a Critical Illness claim to be valid, there would need to be an insured Critical Illness event. Coronavirus itself is not a ‘critical’ illness.

Coronavirus would have no specific impact on group income protection policies unless incapacity continued beyond the end of the policy’s deferred period. It’s effects are unlikely to mean an employee is off sick for the deferred period of an income protection plan which are often 13 or 26 weeks.

Travel insurance policies should be reviewed and checked. Will they cover repatriation or cancellation of booked trips? It is likely to depend upon several factors such as Foreign and Commonwealth Office travel advice, the policy conditions, when the travel policy was taken out and when the trip was booked. 

Group Life insurers have confirmed that deaths from Coronavirus will be covered. There are usually no exclusions under group life policies – all causes of death should be covered subject to eligibility requirements under the policy. However, some policies have a restriction on travelling against foreign office advice. As the foreign office has advised “against all travel (red zone) to a section of China,” Group Life policies may not cover individuals subsequently travelling there on business. They should, however, cover any individuals who travelled on business to an area which was not a red zone when they travelled, but has since become a red zone.

Group Life insurers are also likely to impose a ‘Catastrophe Limit’ or ‘Single Event Limit’ if this outbreak of the coronavirus became a pandemic and/or the catastrophe provisions under the policy are met. These ‘limits’ would vary from policy to policy there is not a standard limit, the size of the scheme and particular insurer will also determine the level of any limit applied. They are likely to be in the range of £5 million to £100 million of claims so it is unlikely the limits would be reached.

Private Medical Insurance providers are unlikely to provide significant assistance in the event of an outbreak. Although PMI members would be covered should they contract the illness, subject to their standard policy terms; it would be highly unlikely that they would be treated in any of the UK private hospitals as these are not set up for patient isolation. NHS Cash Benefit may be payable from certain private medical insurance policies for any NHS in-patient stay.

Businesses may also want to review their business protection policies to consider how they are protected in the event of death or productivity loss due to illness or implications of quarantines. In such circumstances, appropriate business protection cover such as Keyperson or Shareholder/Partnership cover can be invaluable for business continuity. The loss of a keyperson could result in the loss of that person’s skills and  their relationships/business contacts which could have a significant influence on the business. The proceeds of business protection policies could help mitigate the loss of a keyperson or partner.

For any further questions please don’t hesitate to contact a member of the team at EBCam Employee Benefits.