Changes to the tapered annual pension allowance kicked in last month, following a review into how the taper was impacting on the NHS and public service delivery more widely.
The taper can gradually reduce the £40,000 annual pension allowance for those on the very highest incomes. The annual pension allowance is the maximum amount of tax-relieved pension saving you can accrue in a tax year.
To work out the maximum amount you can accrue into a pension this year, we calculate your threshold income and your adjusted income. This only applies to you in 2020/21 if your income exceeds £200,000.
Threshold income is the term for all of your income. This can be from salary, investments or any type of benefit-in-kind paid by your employer.
You will notice one type of income missing: income from pensions. This figure is left out to calculate your threshold income.
To support the delivery of public services, particularly in the NHS, threshold income applies from £200,000, so individuals with income below this level will not be affected by the tapered annual allowance
Adjusted income is all of your earnings from a tax year, including any pension contributions made by you or your employer.
This figure also increased by £90,000 for 2020/21, from £150,000 to £240,000. Those with adjusted income of more than £240,000 in 2020/21 will be affected by the taper.
Chancellor Rishi Sunak said raising these thresholds “will take 98% of consultants and 96% of GPs out of the taper altogether.”
Tapered annual allowance
For every £2 of income you have over £240,000, your annual pension allowance is reduced by £1. For those on the very highest incomes, the minimum level to which the annual pension allowance can taper down is £4,000.
This reduction only only applies if your total income, including pension accrual, is more than £300,000. Proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme will not be taken forward.
Making contributions above the annual allowance will result in a tax charge.
The lifetime allowance is the maximum amount you can accrue in a registered pension scheme in a tax-efficient manner over your lifetime.
For 2020/21, this figure grew to £1,073,100 in line with the Consumer Prices Index rate of inflation from September 2019.