The spring 2020 Budget announced increases to the threshold income and adjusted income limits that you use to work out your tapered annual allowance for pension contributions.
From 6 April 2020, the level of income above which your annual allowance starts to reduce has risen to £240,000 (from £150,000).
If your income was previously over £210,000 (in any tax year from 2016/17 to 2019/20), your annual allowance for that tax year was £10,000. In 2020/21, if your income is up to £240,000, your annual allowance will be £40,000.
If your income is over £240,000, tapering gradually reduces your annual allowance from £40,000 to a minimum of £4,000 (the minimum applies if you have income of £312,000 or more).
Partners with income up to £240,000 and making regular contributions, should consider capitalising on the increased annual allowance.
The higher threshold may provide an opportunity to increase contributions in the 2020/2021 tax year and take advantage of investment opportunities which may arise as a result of the current environment in a tax advantaged manner. Alternatively, if cash flow does not permit, you are able to carry forward any unused annual allowance for three years as long as you held a pension plan in those tax years. The current year annual allowance must be fully used first and then carry forward can be used to increase the contribution provided there is sufficient taxable profits for the contributions to be tax-relievable.
Those partners with income above £240,000 and below £312,000 should consider whether they should amend their contributions so as to make use of the increased annual allowance.
Partners with income in excess of £312,000 will need to consider the impact of the new annual allowance and how that will affect their funding. There may be a need to reduce or suspend regular contributions to avoid exceeding the annual allowance and incurring a tax charge.
Partners should check what unused annual allowance capacity they have in the previous three years and whether they can utilise it in the current year.
What if my drawings are being reduced?
Where Partners are receiving reduced monthly drawings, if possible, pension contributions should continue to be made and some may see this as an opportune time to invest.
What if estimated profit shares are anticipated to be lower as a result of the pandemic?
Partners will need to reflect on the impact on their annual allowance and take appropriate action.
However, it is possible to reduce or suspend pension contributions. Most (but not all) pensions allow this without charge and without penalty. Contributions can be made up later in the tax year, either by increasing monthly contributions or paying lump sums prior to 5th April 2021. There is the ability to carry forward allowances for up to three years, so any increased annual allowance can be utilised in a later year.
Please note that some pension contracts have inbuilt guarantees which are conditional on premiums being paid at the same level until the plan retirement date. Where premiums are reduced or ceased these guarantees could be lost and you should check with your pension provider or financial adviser prior to cancelling or amending Direct Debit Mandates. Some pension providers may also ask for 10 days’ written notice prior to cancelling or amending a DDM.
Pension contributions remain an extremely tax efficient form of saving for retirement and where possible, Partners should ensure they maximise the amount they save into pensions.
Where income restricts tax-efficient pension contributions to just £4,000, you should consider whether these will enable you to build a fund which can provide you with the income you require in retirement.
Pension legislation and tax reliefs can be complex and careful consideration should be given prior to taking any action.
Our financial planning team can help you work out what your annual allowance is and advise on adjusting your contributions accordingly. They can also help you consider other tax efficient means of saving for retirement.
Crowe Financial Planning UK
Limited is authorised and regulated by the Financial Conduct Authority (‘FCA’)
to provide independent financial advice. The Financial Conduct Authority does
not regulate Tax Advice.
The information set out above
represents our understanding of HM Revenue & Customs practice at 01/06/2020
and is for information purposes only
and does not constitute advice to undertake a particular transaction. Appropriate
professional advice should be taken on specific issues before any course of
action is pursued. Any advice provided
by a Crowe Consultant will follow only after consideration of all aspects of
our internal advice guidance.
Past performance is not a guide to future performance, nor a reliable
indicator of future results or performance. The
value of investments, and the income or capital entitlement which may derive
from them, if any, may go down as well as up and is not guaranteed; therefore
investors may not get back the amount originally invested.