Gerry Surtees Chartered Tax Adviser

Every individual has an annual allowance of up to £40,000 that they (or their employer) can contribute to their pension scheme each tax year.

This allowance may be reduced if your personal income exceeds certain limits, and there are tax charges if you exceed your reduced ‘tapered annual allowance.’

However, at the 2020 Budget, the Chancellor announced increases to the threshold income and adjusted income limits that are used to calculate your tapered annual allowance.

The adjusted income limit has risen to £240,000 (increased from £150,000) and the threshold income limit rose to £200,000 (increased from £110,000). The minimum annual allowance that you can have under the tapering rules has also lowered from £10,000 to £4,000.

What is the threshold income?

The ‘threshold income’ is broadly defined as the individual’s net taxable income for the year, subject to adjustments in certain cases.

What is adjusted income?

The ‘adjusted income’ is essentially your threshold income plus the value of all employer pension contributions (including those from your company if you are a company director).

How will this affect you?

You will have a tapered annual allowance if:

• Your threshold income is over £200,000  
• Your adjusted income is over £240,000

If you are subject to the tapered annual allowance, for every £2 your adjusted income goes over £240,000, your annual allowance for that year reduces by £1.

The minimum that this can reduce to is a tapered annual allowance of £4,000.

What about carry forward allowances?

You can still carry forward and use unused allowances from the previous 3 tax years, in addition to your tapered annual allowance. However, you should be aware that these carried forward allowances could be reduced by tapering if your income in those tax years exceeded the old limits (see above).

For more information

We appreciate that this can be quite a complex topic. If you have concerns about your pension annual allowances we’re here to help. You can contact us here or just give us a call on 02476 673160.