Are you a high earner? From 6 April 2020, you may be able to contribute more into your pension.
The changes were brought in mainly to help high earning medical professionals in the NHS. They were facing significant tax charges because of how the pension rules worked. And so, in the March 2020 Budget, the Chancellor announced increases to the income thresholds, which now benefit ALL high earners.
How does it work?
Everyone is entitled to an annual allowance which usually means you can put up to £40,000 a year into your pension.
However, prior to 6 April 2020, if your total income exceeded £150,000 (including pension contributions paid by you and your employer) this annual allowance of £40,000 started to taper until it got to £10,000.
This meant that once your total income exceeded £210,000 your annual allowance was fixed at a minimum allowance of £10,000.
The good news: from 6 April 2020, your total income (including pension) has to reach £240,000 before the annual allowance of £40,000 starts to taper. And it’s only when your income exceeds £300,000 that minimum allowance will kick in.
The bad news: the minimum allowance has been reduced from £10,000 to £4,000.
The tapering rules apply to all pension schemes – including final salary schemes – and apply to your own and your employer’s contributions.
Ok, so what does this mean for me?
- You may have been caught previously by the old tapering rules, but due to the increase in the income limits, you may now be entitled to the full annual allowance of £40,000.
- If your income has significantly increased, you may be a new ‘high earner’ and be caught by the new tapering rules.
- You may have already been caught by the rules and continue to be, however, your tapered annual allowance is now reduced from £10,000 to £4,000
The rules on pension contributions can get tricky, and they vary depending on the pension scheme. So, if you think you’re affected by the changes to the tapering rules, or you’ve got any questions, get in touch.