A change to the annual allowance taper

The thresholds for taper relief on pensions taxation have been increased, although highest earners face some negative changes. Now is a good time to review and potentially increase your pension contributions.

One of the more controversial pension tax rules was slightly reformed in the Budget.

The annual allowance effectively sets your tax efficient limit for the total amount of pension contributions that you and your employer can make in a tax year. If the limit is exceeded, then you essentially receive no tax relief on the excess. That can result in a large employer contribution landing the employee with a tax bill.

The annual allowance was originally introduced at the level of £215,000 in 2006, then rose to £255,000 in 2010/11, before being cut to £50,000 in 2011/12. The reductions were meant to limit the cost of tax relief, but in 2014/15 a further reduction was made to £40,000 and tapering was introduced for high earners from 2016/17. The taper process meant that for the highest earners, the annual allowance was reduced to a minimum of £10,000.

As time has passed, the net cast by tapering rules has captured a growing number of people. Among those have been NHS consultants and GPs, whose NHS pension scheme has generous benefits and thus high (but notional) contributions. As a consequence, some senior NHS staff have turned down additional work, refused promotion or even opted for early retirement.

The Chancellor addressed the issue in his Budget by increasing both the thresholds relevant to taper by £90,000. In 2020/21, nobody with total income of up to £200,000 (after deducting personally made pension contributions) will be subject to the tapering rules. However, there are some losers from the Budget changes, as the minimum annual allowance has been cut to just £4,000 for the highest earners.

There had been rumours of more radical changes to pension taxation, such as limiting tax relief on contributions to basic rate only. These might still appear in the Budget due in Autumn. In the interim, if you have been affected previously by taper relief, you may now be able to increase your pension contributions.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

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