Ministers hope Budget measures announced last week will solve the row over tax on pension contributions that has prompted senior doctors to refuse extra work or even to retire early. But the changes don’t only apply to NHS staff. Anyone previously caught out by complicated rules that reduce pension contribution allowances for high earners could benefit.
The problem centres on the annual allowance: the amount that savers may pay into their private pensions each year. For most people, the cap is £40,000 or your annual earnings if this sum is lower; go over this allowance and you face punitive tax charges. But many high earners only qualify for a reduced annual allowance. Their maximum contribution tapers down according to their income, potentially to as little as £10,000.
Reform or scrap?
Many have called for these complex rules to be scrapped. Instead Chancellor Rishi Sunak substantially increased the income levels that currently bring 250,000 people into the tapering system. This will make a big difference to many of those savers, with the changes costing the Treasury £180m in the 2020-2021 tax year, rising to £670m by 2024-2025.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
To see how you’re affected, first work out your “threshold income”. This is the total of your pre-tax income for the year – including your earnings, your savings and investment income, and any other income you may have. Confusingly, HM Revenue & Customs talks about “net income” in its advice on threshold income. It doesn’t mean income after tax, but the money left after various deductions you are allowed to make. For most people, the only deduction relevant here is your pension contribution.
For any contributions you have made where HMRC has given you tax relief, whether through a workplace scheme or a personal plan, you can include the value of the tax relief in the deduction. The second figure you need to know is your “adjusted income”. This is your threshold income plus any contributions to your pension made by your employer.
So for most people threshold income is total income minus any pension contributions made. Adjusted income is threshold income plus employers’ pension contributions made on their behalf. In the current tax year, anyone with an adjusted income of £150,000 or less doesn’t have to worry about the tapered annual allowance. Anyone above this level is also off the hook if their threshold income is less than £110,000.
However, if you’re above both figures, you get a reduced annual allowance. Your allowance (including your contributions and your employer’s) comes down by £1 for every £2 you’re over the £150,000 income limit. The maximum reduction is £30,000, so if you have income of £210,000 or more, your annual allowance is £10,000.
Same story, new numbers
The Budget keeps this system but changes the figures. From 6 April, the threshold income and adjusted income limits are increasing to £200,000 and £240,000 respectively.
This will take many people out of the tapering system altogether, including most NHS workers. In addition, many of those still caught in the tapering net will be able to make more pension contributions each year without worrying about tax charges.
But it’s not all good news. There will now be a new minimum annual allowance of £4,000. As a result, anyone with an income of more than £300,000 will see their annual allowance drop below the current £10,000 minimum, until they hit the £4,000 minimum at income of £312,000 or more.
Still, most people with a tapered annual allowance will be better off now. They’ll be able to pay more into their pensions, claiming more tax relief as they do so. And even those who do pay tax penalties because they exceed their annual allowance will face lower bills.
-
London Stock Exchange gets go-ahead to run Pisces private stock marketThe Pisces market will allow investors to buy and sell shares in private companies. But how will it work, when will it launch, and who is allowed to use it?
-
Could landlords face National Insurance on rental income?The Treasury is said to be considering a tax increase for landlords in an attempt to boost revenue in Rachel Reeves’s Autumn Budget
-
Is an inheritance tax (IHT) cut on the way?Tax Talk that the government might cut or scrap inheritance tax in its Autumn Statement is rife. We look at how it could be reformed, and what difference it would make.
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Government considering cuts to inheritance tax, reports sayThe Sunday Times reported government officials are considering cuts to inheritance tax ahead of the general election.
-
The best packaged bank accountsAdvice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
