Think back to the Chancellor’s budget proposals in July last year, and you may remember an announcement about changes to the annual pension allowance. Well, that change is set to come into effect at the start of the new tax year on 6th April 2016. It therefore seems like a good idea for a bit of a refresher on what those changes are and what they potentially mean for you.
From 6th April, the annual pension allowance will become tapered. The change will affect anyone earning a taxable income greater than £150,000 in a tax year. For every £2 earned over the £150,000 threshold, the earner’s allowance will be reduced by £1.
The figure of £150,000 will be that of adjusted income – that is, net income plus the value of pension savings in that year, and minus any specific lump sum death benefits that have been paid to the individual. However, a second definition of income – that of threshold income – will also be used to ensure lower paid individuals aren’t unfairly affected. Threshold income is calculated as net income less both specific lump sum death benefits and gross pension contributions.
So, any individual whose threshold income doesn’t exceed £150,000 less the standard annual allowance for that tax year will not be affected by the reduction, no matter what the level of their adjusted income is. For the 2016/17 tax year, the annual allowance is £40,000, so that means that anyone earning £110,000 or lower will not be affected by the new tapered allowance.
The maximum reduction through tapering has been set at £30,000, which means that any individual earning £210,000 or more in a tax year will have their pension allowance limited to £10,000. It’s important that high earners are aware of how the tapered allowance will affect them, as they are likely to need to reduce the contributions both their employers and they themselves are making. If they don’t, they are likely to become subject to an annual allowance charge.
It’s a sensible idea therefore, if you have not done so already, to review the impact of tapered allowance and to take any appropriate financial planning action which may be required.