To support the delivery of public services, particularly in the NHS, the Chancellor has unveiled plans as of next month to raise the point at which tapering of the annual allowance kicks in by £90,000.
This means that from 2020/21 the ‘threshold income’ will be £200,000 (increased from £110,000), so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an ‘adjusted income’ above £240,000.
The tapered annual allowance for pensions has increased. The pensions’ annual allowance is the maximum amount of tax-relieved pension savings that can be accrued in a year.
• Under current rules: The standard annual allowance is currently £40,000. Unused annual allowance from the three previous tax years for the individual can be carried forward and added to the current annual allowance. If the individual’s pension savings for the tax year exceed this total, the annual allowance charge is applied to the excess.The tapered annual allowance applies to individuals with ‘adjusted income’ for a tax year above £150,000 subject to their threshold income exceeding £110,000. Both income limits have to be exceeded before a person is affected by the tapered annual allowance.The annual allowance is reduced by £1 for every £2 of adjusted income above £150,000, subject to a minimum reduced annual allowance of £10,000.
Where the reduction would otherwise take an individual’s tapered annual allowance below £10,000 for the tax year, their reduced annual allowance for that year is restricted to £10,000.
• Proposed revisions: Legislation will be introduced in Finance Bill 2021 to amend the threshold income to £200,000 and the adjusted income to £240,000, whilst also reducing the minimum tapered annual allowance from £10,000 to £4,000.
The lifetime allowance, the maximum amount someone can accrue in a registered pension scheme in a tax-efficient manner over their lifetime, has been reduced from £1.25m to £1m for 2016/17 onwards (subject to transitional provisions) and indexed for 2018/19 onwards so for 2020/21 the lifetime allowance is £1,073,100