Effective 6 April 2020 the rules for contributing to pensions changed. In this article we re-cap on the basics for contributing, and highlight the changes.
The maximum contribution to a pension fund for which a taxpayer can obtain tax relief in any one tax year is 100% of their “relevant earnings”. If you are employed, “relevant earnings” is your employment income (including benefits). If you are self-employed, it is your trading income.
Anyone can pay up to £3,600 per year into a pension scheme, regardless of their relevant earnings. This means you could earn nothing, but contribute up to this £3,600 limit.
The Annual Allowance – what is the allowable total pension input?
The annual allowance is £40,000 per year. It has been at this level since 2014/15. The annual allowance is increased by any unused allowance of the previous three years.
It is important that taxpayers monitor the levels of pension contributions in each tax year so that this year they can take advantage of any unused annual allowance from previous years. When utilising allowance, one must first utilise the current year allowance, followed by year-3, year-2, year-1 in that order. This means you have some calculating to do, or rather, your accountant does.
Until 5 April 2020, ‘high income individuals’ experienced a tapering of their allowance by £1 for every £2 earned in excess of £150,000. The tapering effect can not reduce one’s annual allowance to below £10,000.
Changes from 6 April 2020
From 6 April 2020, the adjusted income limit increased from £150,000 to £240,000. This provides a great benefit to those taxpayers currently earning between £150,000 and £240,000, because it provides them with some ability to contribute to a pension and obtain the relevant tax relief.
Once a taxpayer earns more than £240,000, their allowance will taper from £40,000 down to the new minimum tapered annual allowance of £4,000 (2019/20: £10,000).
Standard Lifetime Allowance
The lifetime contribution allowance for 2020/21 is £1,073,100 (2019/20: £1,055,000). It will increase each year with inflation.
To discuss how the limits might affect your personal situation please don’t hesitate to contact us on 02037 461 594, or email firstname.lastname@example.org.