09 April 2020
Pension changes to income thresholds for calculating the tapered annual allowance from 6 April 2020. As a measure to ease the pressure on high earning medical professionals in the NHS, the Chancellor announced in the March 2020 Budget that the income thresholds are to increase. Previously, the income threshold was set at £110,000, which has now been increased to £200,000. Tapering of the annual allowance will occur where the adjusted income, broadly income plus pension input, exceeds £240,000 up from £150,000. The minimum annual allowance after tapering has been reduced from £10,000 to £4,000.
|
Example: |
£ |
|
Annual salary (net income) |
120,000 |
|
Pension input |
40,000 |
|
Adjusted income |
160,000 |
Under the old rules, both thresholds were breached and the adjusted income exceeded the threshold by £10,000. Although there are no limits to the amount an individual can save or accrue in a registered pension scheme, a limit to the amount of tax relief available is imposed and the standard annual allowance is £40,000.
In this example, the maximum annual allowance available is reduced by £1 for every £2 of the excess of adjusted income over the £150,000 threshold i.e. it is reduced from £40,000 to £35,000. As the pension input was £40,000, it exceeds the maximum amount of relief available by £5,000 creating an ‘excess pension charge’ i.e. a further tax bill based on £5,000 at the marginal rate. If we assume no other income in this example, the rate would be 40% and the additional tax due would be £2,000. Under the new rules, as both the net and adjusted income are below £200,000, there is no restriction on the annual allowance and so no ‘excess pension charge’ at all.
Where an excess pension charge arises, it has been possible, since the rules were introduced on 6 April 2016, to apply for the pension scheme to settle the liability out of the pension fund. The deadline for making this application is 31 July following the anniversary of the tax year in which the charge arose. (for example 31 July 2020 for the tax year ended 5 April 2019).
We understand that the government has agreed that it will top-up the pension pots of those NHS staff affected by these rules for the year ended 5 April 2020 and we envisage the calculation will need to be made to determine the amount of top-up required. Individuals are required to make a declaration on their self-assessment tax returns of the amount of pension input that is in excess of the annual allowance and whether a ‘scheme to pay’ arrangement is in place. As HMRC have not enacted the new rules retrospectively, it is possible that declarations of this kind have been omitted from returns. If you do not normally complete a tax return, but you exceed the annual allowance, you will need to register for self-assessment.
