Pension Tax Relief 20/21

Now we are progressing into the 2020/21 tax year at speed, we should revisit the changes to pension tax relief that may have been overshadowed by recent events.  Pension tax relief was the subject of much debate before the Budget and action was taken to address the issue of the Annual Allowance (AA) charges frequently incurred by senior NHS staff.

As a reminder, for 2019/20 where an individual's 'adjusted income' exceeded £150,000 the £40,000 AA  was restricted by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000 and the restriction did not apply where 'threshold income' did not exceed £110,000.

As 'adjusted income' includes the growth in value of your pension entitlement, this has been a particular issue with defined benefit scheme, such as the NHS scheme.   This has been addressed for 2020/21 by raising both the 'adjusted income' and 'threshold income' amounts by £90,000 to £240,000 and £200,000 respectively. However, where an individual's 'adjusted income' exceeds £240,000 and the AA is restricted, the lowest the AA can be tapered down to is £4,000 for 2020/21 and later years (rather than £10,000). 

As a consequence of these new thresholds, anyone earning over £150,000 should review their pension contributions as the landscape has changed markedly from what they are accustomed to. Taxpayers who may have previously been restricted to £10,000 will now be able to contribute more and some will unfortunately now be restricted to £4,000 per annum before incurring the AA charge.

This tax relief may be reviewed again in the future in light of the economic fallout from the Coronavirus and opportunities should be taken whilst they are available.

Image below summarises impact of changes…