Changes to the pension annual allowance for 2020/21 onwards were announced in the Budget in March, and subsequently confirmed in the Finance Bill. Whilst the changes will benefit many high-earners, there is a sting in the tail for some.
From 6 April 2020, individuals with income up to £240,000 per annum will be entitled to a pension annual allowance of £40,000 (gross) during the tax year. This annual allowance will continue to be reduced by £1 for every £2 of income exceeding the £240,000 threshold as it was previously. However, the maximum reduction in annual allowance is now £36,000, leaving individuals with income of £312,000 or more a pension annual allowance of just £4,000 (gross).
So, although the income threshold has increased from £150,000 in 2019/20, individuals with income over £300,000 will actually have a lower pension allowance for 2020/21 than they had in previous tax years.
Individuals must consider the issues arising from these changes, as pension contributions in excess of the adjusted annual allowance (and any unused allowance brought forward) will result in a pension annual allowance tax charge at income tax rates up to 45 per cent. The rate of tax charged will depend on the individual’s overall level of income.
It is particularly important for individuals making regular monthly pension contributions on or after 6 April 2020, to consider their expected level of income and the availability of allowances brought forward at an early stage in the tax year and reduce their contributions if necessary, in order to avoid a potential tax charge.