UK Budget 2020 and Pensions

We hope this post finds you and your family healthy and coping well with many lifestyle adjustments that are becoming the norm.

Over the month of March there was no shortage of news for you to digest each day. One item that may have slipped past while you were homeschooling your children, reading about lockdowns or new reported cases of Covid-19 was the UK Budget.

On 11 March, during the Budget speech, Chancellor Rishi Sunak announced changes to current Pension thresholds for the new tax year 2020-21. These changes attempted to amend the much-maligned Annual Allowance taper introduced in 2016.  There are positive and negative impacts for many of our clients. Please contact your advisor to see how the changes affect you specifically.

The below table outlines the changes from UK tax year 2019-20 to 2020-21:

  2019-20 2020-21 Change
Annual Allowance* £40,000 £40,000 No change
Tapered Annual Allowance* £10,000 £4,000 Decrease in minimum annual allowance impacts those earning £300,000+
Threshold Income £110,000 £200,000 Increase of £90,000. If your threshold income is below £200,000, you will not be subject to tapered annual allowance
Adjusted Income  £150,000  £240,000 Increase of £90,000. Adjusted incomes in excess of £240,000 will see their annual allowance tapered by £1.00 for every £2.00 over £240,000

* this is a combination of Employee and Employer contributions

HMRC’s definitions of adjusted and threshold income tend to cause a bit of confusion because they start with something called ‘net income’.  A common sense meaning of this would be ‘income after tax’, but here it does not.  Net income in this context is all taxable income less various deductions.

The steps required to calculate Threshold Income and Adjusted Income are beyond the scope of this blog post.  Details can be found here on the Gov.UK website.  We suggest working with your accountant to verify the figures as the steps are ripe with opportunities for errors or omissions.

The good news is that if your income was in the £150,000 to £200,000 range you will now have scope to make a full pension contribution of £40,000.  A lot of the pressure for this change came from NHS doctors getting penalized for working longer, earning more and breaching their annual allowance which comes with penalty.

Now for the bad news.  If your Adjusted Income is greater than £312,000, your annual allowance is reduced to £4,000.  That is £4,000 of total contributions from you and your employer.

The Annual Allowance taper particularly stings for US persons living and working in the UK because saving outside of your pension can give rise to US tax inefficiencies.

As you may be selecting your company benefits during this time and in light of above changes, it’s vital you select the right contribution level to avoid being caught out by unnecessary tax payments or accountant fees when you’re filing your 20/21 tax returns.

We recommend you reach out to your advisor to discuss your correct pension contribution for your income level.

A few other key points from Budget 2020:

  • Increase in pension lifetime allowance to £1.073m
  • State pension to increase by 3.9%
  • Junior ISA limits increased to £9,000
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