The annual allowance limit of £40,000 for gross pension contributions remains unaffected following the 2020 Budget. Unused allowances from the previous three tax years can still be carried forward and added to the current year allowance.
However, there has been a significant change in calculating whether the annual allowance limit needs to be tapered and there are two income thresholds to consider:
With effect from 6 April 2020, the income thresholds triggering the taper of the annual allowance limit will increase by £90,000. This will be welcome news for investors and particularly those in the medical profession who have been significantly impacted by the previous restrictions. However, there will be a reduction to the minimum tapered annual allowance which will restrict the level of pension savings for high earners.
Currently, taxpayers with threshold income over £110,000 are within the abatement rules and their £40,000 annual allowance for pension savings is reduced by £1 for every £2 of adjusted net income over £150,000 to a minimum allowance of £10,000.
From 6 April 2020, the income levels will increase to £200,000 threshold income - £240,000 adjusted net income - therefore enabling individuals to earn more without having to reduce their pension savings.
However, those exceeding the higher threshold will see their annual allowance reduced to £4,000 and as a result will see a reduction in real terms in their ability to fund their pension savings. Contributions in excess of a taxpayer’s annual allowance will continue to be subject to a pension savings tax charge at their marginal rate of tax.
Alternatively, these changes will be broadly positive for any taxpayer whose adjusted net income is less than £300,000 as they will likely see an increase in their ability to fund their pensions. There will also be a reduction in the compliance burden for those taxpayers with a threshold income lower than £200,000 as they will cease to be caught by the rules.
View all our Budget 2020 announcements