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Pension changes affect both individuals and employers

Pension changes affect both individuals and employers

Pension relief changes – what does the Finance Bill mean for you?

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Alex Thornton - profile picture

Director, International Pensions

KPMG in the UK

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At the Budget on 11 March 2020, the Chancellor announced that, from 6 April 2020, there will be an increase in the two thresholds that determine who is affected by the taper (restriction) of the annual pension savings allowance, and by how much. These changes will affect both individuals and employers. The rules are complex and there will be both winners and losers as a result of these changes.

The current position for individuals

At present, if ‘threshold income’ is less than £110,000 (broadly, all income including investment income, less certain deductions) then no taper applies to the annual maximum of £40,000 gross (or the amount of earned income if this is less than this). Where this threshold is exceeded and ‘adjusted income’ is over £150,000 (which is ‘threshold income’ plus all pension contributions) then the annual allowance is reduced by £1 for every £2 of ‘adjusted income’ over £150,000. The annual allowance can only be restricted to a minimum of £10,000 per tax year.

For ‘defined contribution’ schemes, all payments made to registered pension schemes by individuals, employers and those made by salary sacrifice must be considered. For ‘defined benefit’ schemes, commonly known as ‘final salary’ schemes, the relevant amount to consider is broadly the increase in value of the policy.

Unused relief from the previous three tax years can be utilised once the maximum allowance for the current year has been paid but an ‘annual allowance charge’ arises at the marginal rate of tax once these limits have been exceeded.

What is changing for individuals

From 6 April 2020, the ‘threshold income’ limit increases to £200,000 and ‘adjusted income’ to £240,000. However the annual allowance will be restricted to a minimum of £4,000 per tax year.

What should individuals be thinking about

  • Individuals with ‘adjusted income’ between £150,000 and £240,000 are currently limited to £10,000 gross but could contribute up to £40,000 gross (i.e. £32,000 net) from 6 April 2020. Consider increasing regular contributions or making one-off payments; and
  • Individuals with ‘adjusted income’ between £240,000 and £300,000, will still be subject to the taper but may be able to contribute more to their pension scheme than at present. Consider increasing contributions but it may be prudent to wait until towards the end of the tax year when final income levels are more certain.
  • Individuals with ‘adjusted income’ over £300,000, will be subject to more tapering than currently with those with ‘adjusted income’ exceeding £312,000 fully tapered to £4,000 gross. Review existing commitments to ensure an annual allowance charge does not arise.

Employers

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 pensions, 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.

Other changes

From 6 April 2020, the ‘Lifetime Allowance’ will also increase in line with the consumer price index to £1,073,100.

Further help

Calculating the relevant ‘threshold’ and ‘adjusted’ income amounts can be complex. If you need help with these calculations and also any unused relief for earlier years please speak to your usual KPMG contact. Where an ‘annual allowance’ charge has arisen, we can advise you on the tax impact and the options for settling this charge.

We can also 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.

For further information please contact:

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KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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