HM Revenue and Customs have produced the following statement after annual allowance changes were announced in the Spring Budget 2020.
What's changing?
At Budget 2020, the government announced increases to the threshold income and adjusted income limits that you use to work out your tapered annual allowance. From 6 April 2020, the adjusted income limit will rise to £240,000 (increased from £150,000) and the threshold income limit will rise to £200,000 (increased from £110,000).
The Chancellor also reduced the minimum reduced annual allowance that you can have under the tapering rules from £10,000 to £4,000.
What is annual allowance?
The annual allowance is the most you can save in your pension schemes each year with the benefit of tax relief.
For 2020 to 2021 the annual allowance is £40,000 but if you have a high income, your pensions annual allowance may be lower than £40,000.
This tapering of the annual allowance is applied depending on your income within the tax year and applies to all pension savings that you make or that are made of your behalf.
Will the tapered annual allowance apply to me?
To see if the taper applies to you, you'll need to work out your:
- net income in that tax year
- pension savings in that tax year
- threshold income in that tax year
- adjusted income in that tax year
From 6 April 2020, you'll have a reduced ('tapered') annual allowance if both:
- your threshold income is over £200,000 (this was previously £110,000)
- your adjusted income is over £240,000 (this was previously £150,000)
You won't be subject to the tapered annual allowance if your threshold income for that year is £200,000 or less, no matter what your adjusted income is.
What effect does the tapered annual allowance have on my savings?
If you're subject to the tapered annual allowance, for every £2 your adjusted income goes over £240,000, your annual allowance for that year reduces by £1.
From 6 April 2020 the minimum that this can reduce to is a tapered annual allowance of £4,000.
Example 1
For 2020 to 2021 an individual with an adjusted income of £300,000 will exceed the adjusted income limit by £60,000. The individual's annual allowance would be reduced by half of this, so by £30,000. Leaving them with a tapered annual allowance of £10,000 (the standard annual allowance of £40,000 less the £30,000 reduction under the tapering rules).
Example 2
For 2020 to 2021 another individual earns £330,000. Their income exceeds the adjusted income limit by £90,000. Their annual allowance should be reduced by £45,000 (the standard annual allowance of £40,000 less the £45,000 reduction under tapering rules).
However the minimum that the annual allowance can reduce to under the tapered annual allowance rules is £4,000. So, this individual will have a tapered annual allowance of £4,000.
Don't forget though, that you can also carry forward any unused annual allowance from the previous 3 tax years and use this. Your available annual allowance is your reduced (or tapered) annual allowance plus, any unused allowance from the previous 3 tax years.
What should I do if I've made pension savings over my available annual allowance?
If your pension savings made in the tax year are more than your available annual allowance, you should include the excess amount on your Self Assessment return.
This amount is added to your taxable income and you will pay Income Tax on it, at the tax rate that applies to you.