Pension Allowances FAQs
Following the Budget 2020 announcement, the income thresholds are increasing and the minimum tapered annual allowance has shrunk. While this will create opportunities for many, it can create additional tax charges for your highest earners.
GENERAL
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+ What is the Annual Allowance?
The Annual Allowance is the maximum amount of money that can be paid into a pension per year and receive tax relief, the current amount is £40,000 per individual.
+ What is the Tapered Annual Allowance?
Once you pass a certain level of income, your Annual Allowance starts to fall. For every £2 you earn, your Annual Allowance is reduced by £1.
+ What is the minimum Tapered Annual Allowance?
2019/20 – £10,000
From 2020/21 - £4,000
+ What are Adjusted Income and Threshold Income?
They are two measures used to determine whether someone is subject to a Tapered Annual Allowance.
+ When could someone have a Tapered Annual Allowance?
When their Threshold Income is above £200,000 pa and their Adjusted Income is above £240,000 pa.
+ When could someone have had Tapered Annual Allowance in previous years?
In tax years 2016/17, 2017/18, 2018/19 and 2019/20, when their Threshold Income is above £110,000 pa and their Adjusted Income is above £150,000 pa.
COMPANY STRATEGY
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+ We have a blanket £10,000 cap on workplace pension contributions, what do we do?
Many firms adopted this approach when tapering of annual allowance first came into effect, there are both good sides and bad regarding the new Budget announcements.
The good news is that many of your members who would have been previously hit with a tapered allowance will no longer be affected and can pay in a more generous contribution.
EXAMPLE - Someone who was earning £210k was limited to £10k, now they can pay in £40k
The bad news is now the £10,000 cap has been reduced to £4,000 – this means the highest earners may be hit with a tax bill if you continue with your current strategy.
+ What about our cash in lieu policy?
Companies who cap their contributions and pay the balance to the employee as cash in lieu will need to review their policies.
EXAMPLE - People earning over £312k can no longer contribute £10k, they need to make an adjustment to £4k or get a tax bill.
SYSTEMS
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+ What systems to I need to have in place?
We would recommend implementing a tool which allows staff to complete a self-assessment of their circumstances.
+ When do I need to have all process and policies in place?
As the changes took effect from 6/4/2020, this should be looked at immediately.
COMMUNICATION
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+ What do our communications need to focus on?
We would suggest creating a thorough communication strategy, covering off the below...
• What is happening?
• Why is this happening?
• What do they need to do (i.e. log onto a portal to complete a self-assessment)?
• When is the deadline?
+ When do we need to start communicating?
As soon as possible, people need to review their circumstances, otherwise they could easily fail to maximise their allowances or receive an unwelcome tax bill!
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