In 2016/17, the Government introduced new measures to restrict the level of pension tax relief available to high earners which included the ‘tapering’ of standard annual allowance. This area of taxation has proved very complex and failure to understand these rules and their application has resulted in nasty surprises for some in the form of a hefty and unexpected tax liabilities! This has been in the news especially for NHS workers.
The annual allowance is £40,000 and is a limit to the total amount of contributions that can be paid into defined contribution pension schemes and/or the total benefit growth in defined benefit pension schemes each year, for the purpose of tax relief. The annual allowance is based on pension input periods which in turn are aligned to tax years.
Any amount of annual pension contribution/fund growth in excess of the annual allowance limit may be liable to a tax charge calculated using the individual’s marginal tax rate.
Between 2016/17 and 2019/20, tapered annual allowance was triggered when ‘threshold’ income exceeded £110,000 and ‘adjusted’ income exceeded £150,000. Broadly speaking, ‘threshold’ income is defined as an individual’s net income [total income from all sources less allowable tax reliefs] and ‘adjusted’ income is ‘threshold’ income plus pension contributions and /or annual pension fund growth depending upon the type of pension fund(s) held.
When both limits are exceeded, annual allowance will be tapered [reduced] by £1 for every £2 of adjusted income exceeding the £150,000 limit. The maximum reduction is currently £30,000 [adjusted earnings of £210,000 or over] which would result in a capped annual allowance of £10,000.
Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme.
The Issue
Whilst those paying into a defined contribution scheme could easily manage the level of contributions paid within an ‘input period’, the same could not be said for members of a defined benefit scheme for which growth figures are only published after the input year has ceased. Furthermore, many of the remaining defined benefit schemes are within the public sector and members have little or no control over their level of contributions as it is often determined by the member’s pensionable income level. Consequently, medium to high earning members of defined benefit schemes have in many cases, been faced with significant pension fund tax charges.
As a result of the ensuing and often significant tax liabilities, certain public sector bodies in particular, the NHS, have lost a significant number of key senior staff to early retirement and/or reduced working hours. This has had a dramatic adverse effect on the delivery of services in those sectors.
Threshold at which the taper commences raised by £90,000
In the Budget 2020 speech the Chancellor announced a relaxing of the rules on how much higher earners can save into their pensions while receiving tax relief.
From April pension contributions are to be reformed for high earners, including doctors and other senior medical professionals, which have impacted on higher-earning NHS staff. The Chancellor said that 98% of consultants and 96% of GPs will no longer be affected by the new rules.
To curtail the departure of experienced NHS staff, the Chancellor announced revised limits for threshold and adjusted income in his March 2020 budget. For the 2020/21 tax year, both limits are to be lifted by £90,000 resulting in threshold income limit of £200,000 and adjusted income limit of £240,000. Only when both of these revised limits are breached will a person be subjected to tapered annual allowance.
Under the new rules, the annual allowance will only begin to taper down for individuals who also have an adjusted income above £240,000. For those on the very highest incomes, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020.
Any pension contribution and / or pension fund growth in excess of the available annual allowance will be subject to a tax charge at the individual’s marginal rate of tax.
Scheme Pays Election
A person can elect for their pension scheme to settle their tax liability by completing and submitting Form SPE 2 within the designated time period [31 July following the tax year to which the annual allowance charge relates ended].
Armstrong Watson Support
We recommend that any such election is only made after discussion with your IFA as it will impact your future pension fund value. Armstrong Watson Financial Planning and Wealth Management have an abundance of experience with this regard.to discuss your pension fund and potential implications thereof.
For more information or advice please call Steve Shovlin at steve.shovlin@armstrongwatson.co.uk or phone 01228 690200.
