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.