The impact of pension annual allowance changes on high earners

03 Jun 2021

You may have forgotten but significant changes were made to pension tax relief for high earners on the 6th April 2016 and further changes have been made in subsequent Budgets.

The original legislation meant that individuals with threshold income of more than £110,000 and total earnings in excess of £210,000 could only contribute £10,000 per tax year to all pensions inclusive of employer contributions and receive tax relief.  Any excess pension payments were subject to tax at the individual’s highest marginal rate. The advice of many pension advisers at the time was to reduce workplace pension contributions for these individuals to £10,000 per tax year. You may well have taken such action. However what has been less well publicised was a change in this legislation in the 2020/2021 budget which raised the earnings threshold from £110,000 to £200,000 and changed the point at which tapering of annual allowances and therefore tax relief applies. The current basis is summarised below:

  • Adjusted income* of £240,000 (includes employer pension contributions or employee contributions via salary sacrifice) or less, their Annual Allowance is £40,000
  • Adjusted income* of £260,000, their Annual Allowance is £30,000
  • Adjusted income* of £280,000, their Annual Allowance is £20,000
  • Adjusted income* of £312,000 or more, their Annual Allowance is £4,000

* ‘adjusted income’ (includes employer pension contributions or employee contributions via salary sacrifice)

Unfortunately these changes impact your most senior employees both potentially positively and negatively so it is really important you get this right. We would recommend taking the following action:

  • Review employees who you have previously reduced contributions to check if they are no longer affected by tapering and increase the employer contribution.
  • Highlight which employees contributions need to be reduced further to £4,000.

You may also not be aware that if individuals have unused pension Annual Allowance in the previous 3 tax years they can potentially carry this forward to enable contributions in excess of the current year’s annual allowance to be made without a tax liability arising. Bear in mind that in any tax year in which the Tapered Annual Allowance applied, it’s only any unused balance of the tapered figure that is available for carry forward.

If this is all beginning to seem a bit complicated and hard to understand we sympathise. Unfortunately pension legislation and tax relief is a complex area. This is why we offer an annual governance service to our clients to help guide them through the legislation and provide advice and guidance to their affected employees. Please get in touch If this type of service is of interest.

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