COVID-19: The ‘high earner’ pension contribution conundrum

In a surprise move, the adjusted income* level (the point from which the annual allowance is reduced for ‘high earners’) increased from £150,000 to £240,000. This change will present certain individuals with an opportunity to increase their tax relievable pension contributions from a previously restricted allowance of £10,000 gross back to the full annual allowance of £40,000 gross.

However, for those high earning individuals with income in excess of £300,000, the annual allowance continues to taper down from the previous low of £10,000 to just £4,000. The £4,000 minimum applies when adjusted income reaches £312,000 or more.

This means that anyone with anticipated adjusted income in excess of £300,000 for 2020/2021 should review their funding, especially those who had been previously using the full £10,000 restricted annual allowance by way of monthly contributions of £667 net. Those individuals who are likely to exceed an income of £300,000 in 2020/2021 should revisit their funding and consider either reducing or suspending monthly contributions to avoid making payments that will incur an annual allowance tax charge (which, for personal contributions, can have the effect of clawing back the tax relief on the excess contributions).      

Determining income and pension contribution allowances

Calculating adjusted income can present a real challenge for many self-employed individuals as final earnings figures may not be known until several months after the tax year end. Therefore, a degree of guesswork may be required, especially for those individuals where adjusted income may fall between £240,000 and £312,000.

In this scenario it is advisable to err on the side of caution, as current legislation continues to afford high earners the ability to carry forward any unused annual allowances from the previous three tax years.

Impact of COVID-19 on earnings (and annual allowance)

Many companies and self-employed individuals have taken precautionary measures to help with the cashflow management of their business such as:

• 2019/2020 - Deferred payments (and calculations), bonuses and profit shares
• 2020/2021 - Cuts to monthly drawings, initial allocations and salaries.

These measures could create further uncertainty as to final income figures for the previous tax year and the potential for additional profit share or bonuses in the new tax year.

Whilst it is hoped that these may be deferred payments, calculating anticipated income levels and, therefore, annual allowances, becomes increasingly complicated and again, careful consideration needs to be given to current and intended contribution rates.

How do I manage my current contributions?

As a result of reduced monthly drawings or income, a number of our clients have contacted us to discuss reducing or suspending pension contributions to help manage personal budgets during this challenging period.

Most (but not all) modern day Self Invested Personal Pensions (SIPPs) and pension providers will allow you to amend pension contributions without charge and without penalty. Our advice is always to check with your pension provider or adviser prior to taking any action.

What action should I take?

The legislation relating to pensions and tax reliefs is complex. Careful consideration should be given to your options. Seeking professional advice on this matter is important and should result in taking sensible steps that will deliver lasting value.

To discuss this, or other pension issues in more detail, please speak with your financial advisor or contact one of our team at Crowe Financial Planning for guidance.

*Adjusted income is the total taxable income plus employer pension contributions (deemed employer contributions for defined benefit/final salary schemes.