We’ve written previously about some particularly nasty changes to pension tax relief that were brought in for high earners, who sought to lock some of their money away into a pension not only to save for the future, but receive some up front benefit. We’ve explained the background of these changes and what you can do about them and also more detail on how the actual calculation works.
Given the significant backlash and bad press these changes attracted, the government have recently announced some much welcomed updates to the pension taper.
What are the changes?
From 6 April 2020, the government announced a £90,000 increase to the two key thresholds used in calculating if an individual is subject to a pension taper:
- The ‘Threshold Income’ limit has been increased from £110,000 to £200,000;
- The ‘Adjusted Income’ limit has been increased from £150,000 to £240,000.
This means, in essence, that higher earners can earn a much larger amount before having to worry if their pension contributions could attract a tax charge. Remember, you need to exceed both of these thresholds in order for the taper to be a consideration.
There has however been a detrimental change. Before, if you were subject to the taper, your annual allowance could not reduce any lower than £10,000. This has now been revised to a lower amount of £4,000, meaning if you are subject to the taper at its fullest extent, your tax charge will be higher than it would have been previously. (Although your income will need to reach a rather hefty £300,000 before you get to this point).
What has stayed the same?
- The actual calculations in working out both threshold income and adjusted income, unfortunately, remain as devious as they were before. HMRC appear intent to keep the taper’s nasty, surprising nature.
- The total annual allowance (unadjusted) for pension contributions also remains at the same £40,000 per annum.
- You can continue to roll forward any unused pension allowances from the previous three years, providing some extra breathing room if your income suddenly rises enough to push you into the taper, and you haven’t had time to rearrange your affairs.
So, do you still need to worry?
Whilst undoubtedly the changes to the taper will mean that many people previously impacted will no longer be caught, this is by no means a stable position.
HMRC previously anticipated huge additional tax revenue as a result of these changes, and given levels of public spending in the current climate, it may be slightly naive to believe that these generous changes will stick around forever.
It’s therefore as important as ever to actively engage with both your financial advisor and your accountant on a regular basis to ensure that your arrangements work in the best way possible for your specific circumstances.
If you wished to discuss these changes, or are concerned that you may still be impacted by the taper, get in touch with Hive.