How You Could Benefit from the New Pension Rule Changes
16 April 2020 by Sam Pitts-Tucker
Many high earners will benefit from the recent changes to pension tax rules. The onset of the new tax year may therefore be an ideal opportunity to review your allowances and, where appropriate, to maximise your investments for the future.
If you previously faced a taper of your annual allowance you may find the increased threshold means this is not the case anymore, and you have more to invest. Or you may need to potentially reduce your pension savings if you breach the new higher level.
Your annual allowance for pensions
The ‘annual allowance’ is the amount you can put into a pension in a given year tax efficiently. It currently stands at £40,000 gross for individuals. Yet while the goalposts have widened in favour of high earners, their allowance may still gradually reduce depending on their income.
Everyone can earn a certain level of income before their annual allowance begins to taper off. Before the 6th April 2020 these levels were twofold:
A ‘threshold income’ of £110,000 which covered all of your earnings (including investment income) subject to UK income tax.
An ‘adjusted income’ of £150,000 which covered all your taxable income + pension contributions paid by you and your employer.
This effectively meant that for every £2 earned over £150,000 (which included all income + all pension contributions), your annual allowance would gradually reduce by £1 until it reached £10,000 a year.
What has changed?
The recent Budget changes stipulate that the threshold income is now increased to £200,000. Therefore, anyone earning less than this will not face any reduction to the £40,000 annual allowance, it’s that simple.
The adjusted income level has also risen by £90,000 to £240,000, above which your annual pension allowance will taper down. And while the rise in the allowance is meaningful for many, there is a flipside to the giveaway for some.
Whereas before the annual allowance tapered down to £10,000 a year, this is now falling to £4,000 a year for those affected.
The practical implications of the changes
Those earning less than £200,000 a year face no complicated implications. Deciding what to do with a considerable extra sum to invest in a pension each year is likely to be a welcome inconvenience – so if your annual allowance was previously tapered you should now review your situation and decide whether you wish to increase your pension contributions.
A number of high earners, however, should be aware of the taper falling from £10,000 to £4,000 and review – and possibly reduce – their pension savings where appropriate. For example:
If you earn £300,000 a year your annual allowance will be tapered to £10,000 a year. The calculations to produce this show: your adjusted income limit is exceeded by £60,000, so your annual allowance reduces by half of this (£30,000), which is then deducted from the standard annual allowance of £40,000 to leave £10,000.
If you earn £312,000 (or more) this is the level your annual allowance tapers down to £4,000 a year (limit exceeded by £72,000, which is halved to £36,000, which is then deducted from £40,000).
For those employed and contracted in to their employer pension schemes, you should contact your finance department to discuss the implications.
The benefits of re-evaluating your circumstances
If you benefit from the increased annual allowance and have more to invest, you should ensure your investments are working as hard as they could. Low fees make a big difference to the long-term growth of your capital and it is important your money is suitably diversified as we navigate uncertain times.
There is no shortage of complexity where pensions intertwine with other aspects of your finances. Yet there may equally be an abundance of worthwhile opportunities to explore. If you want to see how you can potentially improve your circumstances, please get in touch with one of our financial advisers.
Please remember that when investing your capital is at risk.