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How new pension rules may affect you

Written by Salman Haqqi, Senior Personal Finance Writer

22 June 2020

Here is where you can find the latest pension and annuity changes in the UK and how they will affect your retirement.

Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.

What has changed?

In the 2020 Budget, the UK Government increased the threshold income and adjusted income limits that are used to calculate your tapered annual allowance.

Starting from 6 April 2020, the adjusted income limit rose to £240,000 (increased from £150,000) and the threshold income limit was raised to £200,000 (increased from £110,000).

The Chancellor also lowered the minimum reduced annual allowance that you can have under the tapering rules from £10,000 to £4,000.

What is a tapered annual allowance?

The Pension Annual Allowance (AA) is the annual limit on the amount of contributions paid to, or benefits accrued in, a pension scheme before you have to pay tax.

What is threshold income?

Threshold income is all of your earnings and includes chargeable gains on investment bonds, which are subject to UK Income Tax.

However it is net of all pension contributions that you pay personally to UK registered pension schemes.

Your threshold income does not include foreign earnings as they are not taxed in the UK.

What is adjusted income?

Adjusted income is all of your earnings which are subject to UK Income Tax, including all pension contributions paid by you personally and by your employer.

The difference between ‘threshold income’ and ‘adjusted income’ is that the former excludes pension contributions but the latter includes all pension contributions.

What is the annual allowance?

The annual allowance is the maximum you can save in your pension schemes each year with the benefit of tax relief.

For the 2020/21 tax year the annual allowance is £40,000, but if you have a high income your annual allowance may be lower than £40,000.

This tapering of the annual allowance is applied depending on your level of income within the tax year and applies to all pension savings that you make or that are made on your behalf. 

Will the tapered annual allowance apply to me?

To see if the taper annual allowance applies, you will need to work out your:

  • net income in a tax year

  • pension savings in a tax year

  • threshold income in a tax year

  • adjusted income in a tax year.

Net income is not the same as ‘income after tax’. It is all taxable income minus various deductions, the most important of which is the deduction of contributions paid to workplace pension schemes. This is where the sponsoring employer of the pension scheme deducts employees contributions before tax under PAYE.

From 6 April 2020, you will have a reduced (‘tapered’) annual allowance if:

  • your threshold income is over £200,000 (this was previously £110,000)   

    and

  • your adjusted income is over £240,000 (this was previously £150,000)

You will not be subject to the tapered annual allowance if your pension savings for that year are £200,000 or less, no matter what your adjusted income is.

What effect does the tapered annual allowance have on my savings?

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.

From 6 April 2020 the minimum that this can reduce to is a tapered annual allowance of £4,000.

You can help ensure you have the retirement you want by finding the best personal pension plan to make your money work as hard as it can.

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