Changes to the tapered annual allowance

This article is part of
Guide to Budget 2020

Changes to the tapered annual allowance

Between 2010 and 2011, the annual allowance fell from £255,000 to £50,000 and then dropped to £40,000 from April 2014.

The introduction of the tapered annual allowance in April 2016 brought in many more high earners into scope.

One of the groups that were most affected were NHS doctors, who as a result, started turning down additional work so they would not be caught in the tapered allowance net - triggering major concern for an already under-pressure NHS.

But in the Budget earlier this month, Chancellor Rishi Sunak announced changes to the tapered annual allowance.

Government plans

>This is a much more dramatic shift in the tapered annual allowance than was anticipated.--Jon Greer

The two tapered annual allowance thresholds (threshold and adjusted) have each been raised by £90,000. 

This means that from 2020-21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000. 

Previously, threshold income was £110,000 while adjusted income was £150,000.

The annual allowance for pension contributions is £40,000. But the taper comes into play for higher earners or high-income individuals who are defined as those with an ‘adjusted income’ of over £240,000 (then £150,000) for the tax year, and  threshold income of over £200,000 (£110,000).

Under the budget changes, for those on the very highest incomes, the minimum level to which the annual allowance can taper down will reduce from £10,000 to £4,000 from April 2020. 

This reduction will only affect individuals with total income (including pension accrual) over £300,000 and shred a further £6,000 per year from the annual allowance for those currently at the sharp end of the existing taper rules.

For example, someone on a salary of £400,000 a year will be able to contribute just 1 per cent into a pension with the incentive of tax relief. 

All the other rules pertaining to the annual allowance remain the same.

Impact of new rules

Steven Cameron, pensions director at Aegon says: “While it’s disappointing that the chancellor didn’t simply scrap the dreaded ‘tapered annual allowance’, the £90,000 increase in the earnings threshold when it kicks in (now £200,000) is greater than expected and should offer comfort to many more higher earners that they shouldn’t be affected.

“But for those earning above £300,000, an annual allowance of just £4,000 surely makes pensions redundant for them.”

Jon Greer head of retirement policy at Quilter says: “This is a much more dramatic shift in the tapered annual allowance than was anticipated. Only those with the very highest earnings will now be affected by the annual allowance taper, which will be a welcome change for thousands of people that have been grappling with this complex tax rule.”

"The new system will see the annual allowance gradually eroded for everyone with earnings over £240,000, falling to just £4,000 for anyone with earnings of £312,000 or more.