Jamie McLaren – Financial Planner
The Chancellor’s Budget of 11 March 2020 contained a few notable changes to personal taxation in a budget where additional spending to deal with the COVID-19 pandemic dominated the headlines.
This post will focus on the changes made to the Annual Allowance taper which were made to curtail tax charges applied to NHS staff based on their pension accrual. The change will, however, benefit many other high earners, while restricting the highest earners even further.
What is the Annual Allowance?
The Annual Allowance (AA) restricts the amount that can be contributed to a pension in a given tax year, while still receiving tax relief. This is currently set at £40,000 p.a. but there are a number of other factors to consider:
• It is possible to carry forward any unused AA from the previous three tax years. The AA in the current tax year is used first, then any AA from the earliest year.
• The AA can be tapered down for high earners and this is explained in greater detail in the next section.
• An individual is entitled to make personal pension contributions up to the level of ‘relevant earnings’ – being profits or salary, but even where there is none, it is possible to make contributions of £3,600, as this is the de minimis set in legislation.
• Pension contributions cannot be made beyond the age of 75.
• Once taxable income is drawn from any pension the Money Purchase Annual Allowance (MPAA) is triggered restricting the future contributions to £4,000 p.a.
Tapering of the Annual Allowance
Previously, the AA was reduced from £40,000 (down to a minimum of £10,000) by £1 for every £2 of income above £150,000 (i.e. anyone with income in excess of £210,000 will have a tapered AA of £10,000). A situation may also arise where individuals earning between £110,000 and £150,000 may also see their AA tapered.
This resulted in many higher earning NHS staff being penalised via an AA tax charge for working normal contractual hours, leading to some staff reducing hours while others retired early, putting added pressure on NHS staff resources.
The New Annual Allowance Taper
As of 6 April 2020 (i.e. for the 2020/21 tax year) the taper threshold was increased by £90,000. This means only those with incomes over £240,000 (or £200,000 for certain individuals) would be subject to the AA taper.
Following the change, approximately 250,000 UK individuals will no longer be impacted by the AA taper – many of those being NHS staff, as intended.
The change to the AA taper was not, however, positive news for all higher earners. While the taper threshold was increased, the minimum tapered AA of £10,000 was decreased to a new minimum of £4,000. Anyone with income in excess of £312,000 (or £272,000 for certain individuals) will, therefore, have an AA of only £4,000.
The HMRC policy paper on the change can be found here.