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

Phil Smithyes, Partner, Head of Financial Planning
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The 2021 autumn Budget contained no significant announcements in relation to pensions rates and allowances which means that pension tax reliefs and allowances remain unchanged for the time being. 

As a reminder, the adjusted income* level (the point from which the annual allowance is reduced for ‘high earners’) will continue at £240,000. Therefore, those with adjusted income no greater than £240,000 will continue to enjoy a full annual allowance of £40,000 gross without any taper applying.

However, for those high earning individuals, every £2 of adjusted income above £240,000 will reduce their annual allowance by £1 to a minimum of £4,000 when adjusted income reaches £312,000 or more.

This means that anyone with anticipated adjusted income in excess of £300,000 for 2021/2022 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 2021/2022 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 took 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 – Reductions to monthly drawings, initial allocations and salaries.

We have seen salaries and drawings starting to recover which 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.

As a result, calculating anticipated income levels and, therefore, annual pension contribution 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 in 2020, a number of our clients have contacted us to discuss increasing and/or catching up on missed contributions that they weren’t able to make during that challenging period. Where incomes and drawings have recovered, care needs to be taken that you don’t end up over contributing owing to the tapered annual allowance.

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.

It should also be remembered that the Chancellor announced in the March 2021 Budget that the Lifetime Allowance (LTA) for pension funds will be frozen at £1,073,100 until April 2026. As a result, strong investment growth could end up pushing a client nearer to, or over, the Lifetime Allowance sooner than expected.

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.

Contact us
Phil Smithyes
0118 959 7222
Thames Valley
Miles Clarke
0118 959 7222
Thames Valley
Adrian Crowe 
020 7842 7187
Richard Dean
01242 234421
Aron-Gunningham    Aron Gunningham
0118 959 7222
Thames Valley
Julian Hanrahan
01622 767676
Chris Maguire 600x600
0118 959 7222
Thames Valley
Dharmesh Upadhyaya
020 7842 7325

Risk warning

Crowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide independent financial advice. The Financial Conduct Authority (FCA) does not regulate National Savings or some forms of mortgage, tax planning, taxation and trust advice, offshore investments or school fees planning.

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.

Contact us

Phil Smithyes
Phil Smithyes
Partner, Head of Financial Planning
Thames Valley