We have had an increasing number of clients that have been seeking advice on pension annual allowance issues, as the changes introduced in 2016 have begun to have a noticeable impact.
What is the Annual Allowance and how may it affect you?
The Annual Allowance is the amount that you can pay into a pension each year and still receive full tax relief.
When introduced in 2006, the annual allowance was set as £215,000. This had been increased to £255,000. However, this has been reduced significantly with the limit now being £40,000 (see table below). As such, the changes to the Annual Allowance limit, have had a significant impact of the ability of relatively high earners to fund pensions.
Therefore, it is important to understand the Annual Allowance, as breaching it can result in an unexpected tax charge. Recent high profile examples of this are doctors, dentists, and other NHS high-earners. Our recent blog article goes it this in more detail. Blog: NHS pension scheme members face unexpected tax bills.
History of Annual Allowance limits since 2006
2016 – 2019 £10,000 – £40,000
Furthermore, additional legislation called the ‘tapered annual allowance’ was introduced in 2016, which gradually reduces the £40,000 limit down to as low as £10,000.
Tapered Annual Allowance
The Tapered Annual Allowance was introduced in 2016 and takes into account more than just salary and earned income.
From 2016/17, the allowance was held at £40,000 as per 2015/16. However, where an individual’s adjusted income exceeds £150,000 – and certain threshold conditions are met – their annual allowance will be reduced by £1 for every £2 of allowance (the taper annual allowance) to a de minimis limit of £10,000 (when earnings breach £210,000).
Thus, some high-earners will be in a position that further meaningful pension funding is off the table. For more, this pain will be felt simply by virtue of employer contributions into corporate pension schemes e.g. a 10% of salary employer contribution for an employee earning in excess of £210,000.
The calculations and planning around Annual Allowance and the Tapered Annual Allowance can become fairly involved, particularly when individuals remain active members of defined benefit (nee final salary) pension schemes and where transitional pension input periods can muddy the waters.
As such, the proper advice can add tangible value. If you would like a confidential, no-obligation appraisal of your current circumstances, please get in touch and make an appointment.
For more information:
-> Blog: Pension Lifetime Allowance Changes