Richard Coombs, Tax Partner at Bates Weston reviews the pension changes announced during the March 2020 Budget.
“For those that watched the Chancellor’s speech live earlier this week, they may be forgiven for thinking that there were pension changes aimed specifically at NHS doctors and dentists. Whilst one of the reasons for announcing the changes was certainly the negative impact that the previous rules were having on these medical professionals, the new rules will of course apply to anyone (or at least anyone earning enough for the changes to make a difference).
So what pension changes have been made?
The main change is that the two tapered Annual Allowance thresholds for pension tax relief will be increased by £90,000. This represents an increase from £150,000 to £240,000 for “Adjusted Income” and an increase from £110,000 to £200,000 for “Threshold Income”.
“Adjusted Income” is essentially total taxable income before making any adjustments for pension contributions.
“Threshold Income” is the same taxable income but after deducting qualifying pension contributions.
So, in very simple terms, if your gross salary is £200,000 and you made £40,000 gross pension contributions in the year, then your Adjusted Income is £200,000 and your Threshold Income is £160,000.
If your Threshold Income and your Adjusted Income exceed HMRC’s limits then your Annual Allowance (i.e. the amount of pension contributions you can make which can be relieved against tax) is tapered down from the maximum of £40,000 by £1 for every £2 that your Adjusted Income exceeds the limit, subject to a minimum allowance.
Prior to the Budget, the minimum allowance was £10,000, meaning that someone would have to be earning over £210,000 before they hit the minimum (i.e. £210,000 is £60,000 over the £150,000 limit, so the Annual Allowance is reduced by £30,000 to the minimum £10,000).
If you pay more than this into your pension then the excess is effectively treated as your income and taxed accordingly. This was what the comment about the doctors and dentists related to – their pension contributions were based on their salaries and therefore they were regularly breaching the allowance, meaning a penal rate of tax. This led them to work fewer hours or take early retirement – certainly not what this country needs in the current climate of Coronavirus.
The increase in these allowances now means that the £40,000 limit will only be reduced if earnings exceed £240,000, and according to the Chancellor this will mean that all but the very highest paid consultants and GPs (98% and 96% respectively) will no longer be affected by the taper.
There is a slight sting in the tail though. For those very highly paid people, the maximum tax relief they will now receive is reduced from £10,000 to £4,000 worth of pension contributions. This means that anyone earning in excess of £300,000 will see a reduction in the tax relief to below £10,000 (i.e. £300,000 is £60,000 above the new limit of £240,000 meaning a £30,000 reduction in the Annual Allowance to £10,000).
So whilst, inevitably, there are some losers, for the vast majority these pension changes are welcome and mean that the valuable tax relief on pension contributions is maintained.”