Changes to the Annual Allowance from 6 April 2020
IMPORTANT NOTE: These changes will affect how to work out whether you are affected by the Annual Allowance for the 2020/21 tax year.
As part of the 2020 spring budget, the Chancellor announced changes to the limits used to work out your Annual Allowance. This also affects working out whether you are liable to pay an Annual Allowance tax charge.
What are the changes?
The changes are:
- Threshold Income will rise by £90,000 to £200,000
- Adjusted Income will rise by £90,000 to £240,000
- The minimum Annual Allowance will drop from £10,000 to £4,000.
All the changes take effect from 6 April 2020 for the 2020/21 tax year.
How will this affect me?
| For the 2020/21 tax year: | |
|---|---|
| If your Threshold Income is £200,000 or less | your Annual Allowance will be £40,000 |
| If your Threshold Income is more than £200,000, and your Adjusted Income is £240,000 or less | your Annual Allowance will be £40,000 |
| If your Threshold Income is more than £200,000, and your Adjusted Income is over £240,000 | your Annual Allowance will reduce by £1 for every £2 your Adjusted Income is over £240,000 |
| If your Adjusted Income is £312,000 or more | your Annual Allowance is the minimum possible: £4,000 |
You can see how the Annual Allowance reduces when Adjusted Income increases in the chart below.
Important notes:
If you have taken any of your Defined Contribution (DC) pension savings as a taxed cash lump sum, from an income drawdown fund or to buy a short-term annuity, your Money Purchase Annual Allowance is £4,000 – regardless of your Threshold Income and Adjusted Income.
If you have any unused Annual Allowance in one or more of the previous three tax years, you may be able to offset any Annual Allowance charge in the current tax year. This is called Carry Forward.
How is this different to previous tax years?
In 2019/20 and previous tax years, if your Threshold Income was more than £110,000 and your Adjusted Income was more than £150,000, then your Annual Allowance reduced from £40,000, by £1 for every £2 your Adjusted Income was over £150,000, with a minimum of £10,000.
As in previous years, the pensions team will be issuing Pensions Saving Statements in the Autumn to members who may be impacted by the tapered Annual Allowance in the 2019/20 tax year.
The changes mean that, in 2020/21, your Threshold Income will need to be more than £200,000 and your Adjusted Income more than £240,000 before your Annual Allowance reduces. This means that some people will be able to save more before exceeding the Annual Allowance.
The minimum possible Annual Allowance is now lower at £4,000. This means certain high earners will have a lower Annual Allowance and so pay more tax.
| Pre-2020/21 situation | Comments | 2020/21 situation |
|---|---|---|
| My Threshold Income was less than £110,000 | Your Annual Allowance was £40,000 | Your Annual Allowance in 2020/21 will be £40,000, unless your Threshold Income is more than £200,000 and your Adjusted Income is above £240,000 |
| My Threshold Income was more than £110,000, but my Adjusted Income was less than £150,000 | Your Annual Allowance was £40,000 | Your Annual Allowance in 2020/21 will be £40,000, unless your Threshold Income is more than £200,000 and your Adjusted Income is above £240,000 |
| My Threshold Income was more than £110,000, and my Adjusted Income was more than £150,000 | Your Annual Allowance reduced by £1 for every £2 your Adjusted Income was over £150,000, to a minimum of £10,000 | You may be able to save more into your pension. Your Annual Allowance in 2020/21 will be £40,000, unless your Threshold Income is more than £200,000 and your Adjusted Income is above £240,000 |
| My Threshold Income was more than £200,000 and my Adjusted Income was above £240,000 | Your Annual Allowance reduced by £1 for every £2 your Adjusted Income was over £150,000, to a minimum of £10,000 | You may have a lower Annual Allowance and so need to pay more tax. Your Annual Allowance in 2020/21 will reduce by £1 for every £2 your Adjusted Income is over £240,000, to a minimum of £4,000 |
