Annual Allowance Print
The annual allowance is as follows:
The total of all pension contributions made by, or on behalf of, the individual to all their pension plans are tested against the annual allowance for that tax year.
Tax relief on pension contributions for high earners is restricted. The annual allowance is restricted for individuals who have taxable income (known as adjusted income) in excess of £240,000 for the tax year 2020/21 or a later year. The allowance is reduced by £1 for every £2 of taxable income over £240,000. For the years 2016/17 to 2019/20 the restriction applied where the income exceeded £150,000. Any resulting reduced annual allowance is rounded down to the nearest whole pound.
From 2020/21 onwards the maximum reduction is £36,000, so anyone with income of £312,000 or more will have an annual allowance of £4,000. Prior to 2020/21 the maximum restriction was £30,000 leaving an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.
The tapered reduction does not apply to anyone with ‘threshold income’ of no more than£200,000 (£110,000 for years up to April 2020. Adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes pension contributions. For example, an individual with a threshold income of £220,000 and £50,000 of employer pension contributions for 2021/22 would be restricted as the adjusted income would be £270,000. An individual with a threshold income of £195,000 and £50,000 of employer pension contributions would not be restricted, as the pension contributions are disregarded due to the level of the threshold income. There are rules in place to prevent the use of salary sacrifice to circumvent the legislation.
The annual allowance charge is a tax charge on the individual which arises when the total pension input amount paid for an individual by his employer during the tax year concerned exceeds the annual allowance.
Where the total pension input amount exceeds the annual allowance, the annual allowance charge is levied on the excess.
The charge is tailored to recoup the full marginal tax relief that an individual has benefitted from.
Increases to the value of pension input under a final salary scheme are measured by comparing the value of the pension at the beginning of the input period (increased by CPI) with the value at the end of the input period and then multiplying that amount by a factor of 16 to measure the input. Company contributions or “pension input” in excess of the annual allowance will be subject to tax on the individual as a benefit in kind.
If during the input period which ends on 5 April 2021 the accrued pension increases from £25,000 to £27,000 and CPI is 2.5%, the deemed contribution to be tested against the Annual Allowance is (£25,000 x 1.025 – £27,000 = £1,375) x 16 = £22,000 and therefore within the standard allowance.
If the increase in benefit is more than £40,000 then there will be a tax charge (assuming the full Annual Allowance is due).
If the charge is greater than £2,000 this may be met by the pension scheme instead of the member but this is paid from the member’s benefits.
There are three other situations where part or all of an individual’s pension savings will not be liable to the annual allowance charge for the tax year. These are if the member:
Retires due to severe ill-health; or
Is a deferred member whose benefits do not increase beyond certain levels.
Where the total pension input amount exceeds the annual allowance, the annual allowance charge will be levied on the excess.