Budget 2020 analysis: Tax on pensions
In this blog we review the pension tax changes to income thresholds for the annual allowance and tapered annual allowance from 6 April 2020 following the announcements made in the 2020 Budget.
Whilst there are no limits to the level of contributions an individual may wish to make into a registered pension scheme, there is an annual limit on the amount of contributions on which tax relief can be claimed.
This is known as the annual allowance and it currently stands at £40,000. If total pension contributions for the tax year exceed this amount (and any unused allowances from the three previous tax years), the individual may incur the annual allowance charge on the excess.
Tapered Annual Allowance
Once an individual’s ‘adjusted income’ limit and ‘threshold income’ limit are exceeded, their annual allowance will be tapered. The limits are as follows:
Both of the above income limits must be exceeded before an individual is affected by the tapered annual allowance. If this applies, for every £2 an individual’s adjusted income goes over the adjusted income limit, their annual allowance for that year reduces by £1.
In the current tax year (2019/20), the minimum reduced annual allowance an individual can have is £10,000. However, from 6 April 2020 this minimum amount is reduced to £4,000.
For specific advice related to the pension changes the Budget 2020 announcement, please contact a member of our tax team