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The pensions taper – a savings opportunity for most but what does it mean for you?

Within the budget, the Chancellor announced a – largely positive – change to the pensions ‘taper’. The changes are applicable to every sector, so potentially you could see a savings benefit from the new rules regardless of your profession.

The principal motivation behind the change is to reduce the pension tax charge levied on senior healthcare workers within the NHS. It is hoped this will end the substantial tax deterrent to health sector experts from increasing working hours or returning to work. More about this can be found here.

But the motivation to improve things for NHS employees has brought about a benefit for all (well, almost all), which I attempt to illustrate now.

What is the pension taper?

The taper reduces the amount savers can contribute to a pension, based on the level of one’s taxable income. And this is a big deal because – bar a few esoteric, high risk schemes – pensions are the most tax efficient way to save in the UK. Any restriction on the amount workers can contribute to a pension can be felt keenly when tax returns are completed and dues are paid.

At present the ‘standard’ pension annual allowance – the amount that can be contributed to a pension and attract tax relief – is £40,000 per year. This allowance starts to reduce on a sliding scale once income reaches £150,000pa, down to £10,000 per year when annual income reaches £210,000 or more.

Any contributions made in excess of the annual allowance generate a tax charge on the individual at their marginal rate (so, up to 45%), regardless of whether the contributions are made by the individual or by their employer or by their own business.

What is changing?

From the new tax year, the taper won’t take effect until income reaches £240,000. This is good news for many; specifically those with income in the range £150,000 to £300,000.

In addition, the minimum annual allowance is reducing from £10,000 to £4,000 for those with very high income.

What about me?

The table below shows the maximum pension contribution (technically ‘pension input’) that can be made by those with varying levels of income, both under the existing rules and after the budget-announced changes take effect.

The table is designed to show the impact on those who are self-employed, employed, or are business owners, and are making personal contributions only to a ‘defined contribution’ scheme.

Adjusted IncomeAnnual Allowance – Old rulesAnnual Allowance – New rules
£150,000 or under£40,000£40,000
£160,000£35,000£40,000
£170,000£30,000£40,000
£180,000£25,000£40,000
£190,000£20,000£40,000
£200,000£15,000£40,000
£210,000£10,000£40,000
£220,000£10,000£40,000
£230,000£10,000£40,000
£240,000£10,000£40,000
£250,000£10,000£35,000
£260,000£10,000£30,000
£270,000£10,000£25,000
£280,000£10,000£20,000
£290,000£10,000£15,000
£300,000£10,000£10,000
£310,000£10,000£5,000
£312,000 and above£10,000£4,000

Annual allowance limits quoted gross.

The table above ignores the use of ‘carry forward’ provisions, which allow pension contributions to be made in excess of the allowances quoted in some circumstances. Significant personal contributions made under the carry forward rules can have the effect of preserving the annual allowance in full by reducing one’s ‘threshold income’ below £110,000 (currently) or £200,000 (from 2020/21 tax year).

The carry forward provisions are not changed by the latest announcement. However, in practice the scope for savers to reduce their threshold income by making larger pension contributions is likely to be reduced because of a lack of sufficient unused carry forward allowance available from previous years.

That said, there is an opportunity for those who have recently received or expect to receive a large income increase to take advantage of the change in taper limits. Likewise, those with income in the region £240,000 to £300,000 should review their position carefully as there may still be an opportunity to make sizeable pension contributions.

FEATURING: Tom Parry
Tom joined FCFP in 2010 having previously worked in the financial services industry in various capacities, since 1999. He has extensive experience of providing pensions… read more
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