Pensions annual allowance changes for higher earners

The March 2020 Budget included changes to the pensions Annual Allowance (AA) for higher earners effective from 6 April 2020.

The AA is the maximum amount of tax-relieved pension savings accrual in a year and this is to remain at £40,000. However, for those on higher incomes, the annual allowance is reduced by £1 for every £2 that an individual’s ‘adjusted income’ exceeds £150,000 (prior to 6 April 2020), subject to a minimum AA of £10,000 (above £210,000). Adjusted income is broadly net income before tax with the addition of any pension accrual (including from an employer). The taper can only apply to an individual with income before tax, without the addition of the pension accrual, above £110,000. This is known as the ‘threshold income’.

The level of adjusted income above which AA is tapered and the threshold income will each be raised by £90,000 for 2020/21. The threshold income will thus be £200,000, so individuals with income below this level will not be affected by additional tapering of AA. Apart from this, the AA will be tapered for individuals whose adjusted income exceeds £240,000.

There is also a change to the minimum AA, which is reduced from £10,000 to £4,000 from 6 April 2020. This reduction will mean a restriction of AA only for those individuals with adjusted income over £300,000.

The rate of taper is unchanged and will thus reduce AA (from 6 April 2020) by £1 for every additional £2 of adjusted income between £240,000 and £312,000. For adjusted income above £312,000 the AA will not fall below £4,000. The band of adjusted income over which taper of AA operates is thereby broadened from £60,000 to £72,000.

The rules that enable the AA limit for a given tax year to be increased by any unused AA from the previous three years remain unchanged.