THE TRANSATLANTIC MAGAZINE
THE TRANSATLANTIC MAGAZINE
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On 11 March Chancellor, Rishi Sunak, delivered the first Budget of the decade which many believed was going to bring about large scale tax reforms. Coronavirus and the government’s response to support the economy took main stage but, within the statement, there were a few tax reforms that took hold. One was with respect to UK pensions and the application of tax relief on contributions going forward.
For the last decade UK pensions have been a focus, with a continual reduction in annual contribution allowances and lifetime contribution limits. There has been a public debate as to the level of tax relief individuals should be allowed to receive and what is perceived to be fair for different income levels.
To set the scene on some of the most recent changes, back in April 2016, annual contribution allowances to UK pensions began to be subject to a taper once an individual’s income exceeded certain levels. A full annual allowance for contributions into a UK pension was set at £40,000 for individuals with an adjusted income of £150,000 or less. In each tax year, individuals would have their annual allowance reduced by £1 for every £2 of income above £150,000, with a minimum reduced annual allowance of £10,000. This meant that individuals with incomes of £210,000 and above would be subject to the £10,000 annual allowance from April 2016 onwards.
The tapered annual allowance would apply when an individual has an ‘adjusted income’ for the tax year in excess of £150,000 and an individual’s ‘threshold income’ for the same tax year is in excess of £110,000. Broadly, these two definitions account for whether pension provisions are paid on either a gross or net basis. If contributions are made in excess of the individual’s annual allowance, then an annual allowance charge in the form of income tax would be payable by the individual on the amount in excess.
Over the last few years, following the introduction of the tapered allowance, there have been calls for some carve outs on the new rules for those participating in some of the large institutional final salary pension schemes, such as the NHS, as some doctors said that they were being discouraged to take on more hours as their pension contributions were being caught under these new tapering rules.
In a bid to encourage doctors to take on additional work without worrying about unexpected tax bills, the Chancellor decided that he would increase the income thresholds by £90,000 before the tapering allowances begin to apply. At the same time, the minimum tapered allowance has been reduced from £10,000 to £4,000 for those earning above £300,000.
So, what does this look like in practice? Going forward, the £40,000 annual allowance remains in place for individuals with an ‘adjusted income’ of £240,000 or less. Individuals with incomes in excess of £240,000 will be subject to the same tapering calculation as previously outlined. The chart below illustrates annual allowances at different adjusted income threshold levels:
| Adjusted Income Threshold | Pension Annual Allowance |
|---|---|
| £240,000 and lower | £40,000 |
| £260,000 | £30,000 |
| £280,000 | £20,000 |
| £300,000 | £10,000 |
| £306,000 | £7,000 |
| £312,000 and above | £4,000 |
Anyone whose earnings previously were between £150,000 and £300,000 will be better off than under the prior tapering rules, while those earning more than £300,000 will be subject to the further tapering from £10,000 to £4,000. At £312,000 income and above, the contribution allowance will be £4,000. It is largely viewed that this change is just a sticking plaster solution for the short-term and that longer lasting simplification changes will be placed on the table again in the not too distant future.
Given the recently enacted changes, it can be important to review your UK retirement accounts in the context of your broader Wealth Planning strategies and ensure that you fully ulitize your contribution allowances to the extent possible. As noted earlier, it is certainly not expected that this will be the last of UK pension changes on the horizon.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Advisor in the United States of America.
This article does not take into account the specific goals or requirements of individuals and is not intended to be, nor should be construed as, investment or tax advice. Information contained in this article is based on MASECO’s understanding of current regulations and tax law and legislation which is subject to change. MASECO Private Wealth is not a tax specialist and does not provide either tax or legal advice. The tax treatment of any investment strategy or investment in a financial instrument depends on the individual circumstances of each person and may be subject to change in the future. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy. We strongly recommend that every person seeks their own tax advice prior to acting on any of the tax opportunities described in this article.
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