PensionsMar 19 2020

Changes to the tapered annual allowance

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Changes to the tapered annual allowance

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.

Questions have to be asked about the original policy design behind the tapered annual allowance.--Jon Greer

“That said, it will be a significant tax saving for many senior consultants who were facing a difficult choice of taking on additional work and incurring huge tax bills. The ultimate tax saving for some could be six figures."

Threshold Income is broadly defined as ‘the individual’s net income for the year. 

This will include all taxable income such as, salary, bonus, pension income (including state pension), taxable element of redundancy payments, taxable social security payments, trading profits, income from property (rental income), dividend income, onshore and offshore bond gains and taxable payment from a purchased life annuity.

It also includes interest from savings accounts held with banks, building societies, NS&I and Credit Unions, interest distributions from authorised unit trusts and open-ended investment companies, profit on government or company bonds which are issued at a discount or repayable at a premium and income from certain alternative finance arrangements, less the amount of any taxable lump sum pension death benefits paid to the individual during the tax year that can be deducted from the threshold income.

Under the new rules if that gets to more than £200,000 then you need to calculate the adjusted income.

Adjusted income is all income plus any pension contributions paid in the relevant period. A note by AJ Bell says, this means sacrificing salary or bonus payments for employer contributions purely to reduce your adjusted income for this purpose would be ineffective.

The changes to the tapered annual allowance might mean that less people are penalised, but it doesn't make the pension tax system any simpler.

Tapered allowance reform?

>Just because you get an annual allowance charge, doesn’t make having a pension a bad idea.--Les Cameron

Mr Greer says: “Questions have to be asked about the original policy design behind the tapered annual allowance. It was ill-conceived from the outset and now it is being overhauled after just a few years, with the government giving up a big chunk of expected tax revenue in order to partially unwind some of the policy flaws.”

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