Tax allowance changes
April 5, 2020Changes to both the Annual Allowance and Lifetime Allowance came into effect in April 2020.
Annual Allowance
The Annual Allowance is the amount you can save each tax year, across all of your pension arrangements, before tax is charged. For most savers this is £40,000 but from April 2016 the Government introduced the ‘Tapered Annual Allowance’ .
From April 2020, your Annual Allowance will reduce below £40,000 if your ‘adjusted income’ is over £240,000. For every £2 that an individual’s Adjusted Income exceeds this threshold, the Annual Allowance will be reduced by £1. The minimum Tapered Annual Allowance is £4,000 for anyone with adjusted annual income of £312,000 or above. ‘Adjusted income’ is explained further in the guide.
If your taxable income is more than £200,000, you may be affected by this change and you need to work out your ‘adjusted income’. The changes are more likely to affect you if you hold or have held a Senior Ministerial post or have been an Office Holder at some point during the review period. Also, buying Added Years or Added Pension or paying AVCs all increase your pension accrual and could increase your chance of breaching the new limit.
Please note that between April 2016 and April 2020, the Adjusted Income threshold was £150,000, the threshold for your taxable income was £110,000 and the minimum Tapered Annual Allowance was £10,000 for anyone with an adjusted income of £210,000 or above.
Lifetime Allowance
The Lifetime Allowance is the amount you can build up in all of your pension arrangements (excluding the State Pension) over your lifetime before additional tax is charged.
From April 2020, the Lifetime Allowance will be increased from £1,055,000 to £1,073,100 . Optional protections will be available, which may assist those affected by the reduction.
You could face large tax bills if you exceed either the Annual Allowance or the Lifetime Allowance, so please take the time to learn more about the changes and how they may affect you by reading our guide.