Changes to the tapered allowance for pensions might mean that some employers need to take action.
Individuals can obtain UK income tax relief on up to £40,000 of pension savings in a tax year. For those on the highest incomes, this annual allowance tapers down, reducing by £1 for every £2 of ‘adjusted’ income above a threshold to a current minimum of £10,000. The Finance Bill includes legislation to implement changes to this taper which were announced at the Budget. Some individuals and employers might need to take action.
At the Budget on 11 March, the Chancellor announced that, from 6 April 2020, there will be an increase in two thresholds that determine who is affected by taper of the annual pension savings allowance, and by how much.
These changes should reduce the impact of tapering, so that individuals no longer so affected by the taper will be able to make more pension contributions than before.
Measures included in the Finance Bill confirm that from 6 April 2020 only those with ‘threshold’ UK taxable income of £200,000 (currently £110,000) or more will need to calculate their tapered annual allowance. The annual allowance will than begin to taper down only for individuals with an ‘adjusted’ income (which, though the precise rules are complex, broadly speaking includes pension accrual) above £240,000 (currently £150,000) for the tax year.
However, for those with ‘adjusted’ income (including pension accrual) over £300,000, the annual allowance will taper down to a minimum of £4,000 (compared to the current minimum of £10,000).
From 6 April 2020, the Lifetime Allowance will also increase in line with the consumer price index to £1,073,100.
Whilst these changes should be good news for many individuals previously affected by taper, the most senior executives could be worse off.
Some individuals might need to change their current contributions (as rule of thumb, those earning over £110,000 should confirm whether they will be affected) in order to benefit from the new rules, or avoid unexpected charges on excess pension contributions.
In either case, the rules remain complex and affected individuals might look to their employers to provide information and guidance over and above that provided by the pension administrator.
This was often the case when the taper rules were introduced in 2016. Some found the tapered annual allowance hard to understand, and many employers provided executive education on the topic.
Employers who offer alternatives to pension, such as cash top ups, to employees who are currently affected by the taper should review those policies and consider whether they should be updated to take account of what changes mean for their population.
KPMG in the UK advises employers, trustees and individual executives across a broad range of UK and international pension tax issues matters.
We can help employers and trustees determine the policy and operational impacts of these changes, as well as to communicate the practical implications and potential courses of action to affected populations.
If you would like to talk through what these pension changes mean for you, please get in touch with Alex Thornton, Director, KPMG in the UK, your usual KPMG contact, or email firstname.lastname@example.org.
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