Tapered pension annual allowance: what changed after the 2020 Budget?

Firstly: What is tapered annual allowance?

Let’s begin by understanding the annual allowance. This is the maximum you can save in your pension schemes each year. For the 2020/21 tax year the annual allowance is £40,000, but if you have a high income your annual allowance may be lower than £40,000. This is called a tapered annual allowance.

Tapered annual allowance rules are applied when your level of income within the tax year exceeds the Threshold income limit and the Adjusted income limit

What is ‘threshold income’?

Threshold income is all of your earnings (not just your salary) and includes gains on investments. Foreign earnings do not count towards threshold income as they are not taxed in the UK.

What is ‘adjusted income’?

Adjusted income is all of your earnings which are subject to UK Income Tax, including all pension contributions paid by you and by your employer. The difference between ‘threshold income’ and ‘adjusted income’ is that the former excludes pension contributions but the latter includes all pension contributions.

So, what are the recent changes?

The Government has announced a significant increase to the threshold income and adjusted income limits that are used to work out the tapered annual allowance.

From 6 April 2020, you will have a reduced (‘tapered’) annual allowance if:

your threshold income is over £200,000 (this was previously £110,000) and
your adjusted income is over £240,000 (this was previously £150,000)

How does the tapered annual allowance affect my pension savings?

If you are 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 this reduces all the way to a £4,000 annual allowance (which has recently been lowered from £10,000).

What’s the Next Step?

If you have concerns about your pension annual allowances or would like to speak to someone about your pensions or other investments, we’re here to help you. You can either phone us directly or click below to book a meeting with one of our professional advisers.