The Finance Bill 2020 was published on 19 March.
The key pension measure, as announced in the 11 March Budget, is clause 21 on the Tapered Annual Allowance or ‘TAA’ (see below for the background to the TAA).
This provision amends the TAA legislation in the Finance Act 2004 (FA 2004). It increases the maximum threshold income and adjusted income which an individual can earn without their annual allowance being reduced (or ‘tapered’). However, the clause also decreases the minimum TAA from £10,000 to £4,000.
In more detail, the definition of a “high-income individual” is changed so that the tapering of the annual allowance will only apply to individuals whose adjusted income is greater than £240,000 (previously £150,000) and whose threshold income is greater than £200,000 (previously £110,000).
The amendments to the Finance Act 2004 have effect for the tax year 2020-21 and subsequent tax years.
The measure will impact an estimated 250,000 individuals who are currently affected by the TAA. Those earning more than £300,000 will see a reduction in their annual allowance and will pay more tax as a consequence. Likewise, those earning below £300,000 adjusted income are likely to see a reduction in the tax they pay because they are either no longer impacted by the taper and are entitled to the full £40,000 annual allowance, or they are still impacted by the taper, but their TAA has increased.
Scheme administrators of registered pension schemes will need to modify their systems to accommodate for the changes.
The Finance Bill also confirms the tax rates and thresholds for 2020/21 and these can be viewed at – https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2020-to-2021.
| What is the TAA?|
The government introduced the TAA with effect from 6 April 2016 for those with incomes of over £150,000 including pension savings. The TAA is triggered when both the threshold income and the adjusted income (see below) exceeds their designated limits. The £40,000 annual allowance is reduced by £1 for every £2 that the adjusted income exceeds £150,000, to a minimum annual allowance of £10,000.
The government announced a review of the TAA because of its impact on the NHS and delivery of public services. Following this, the government confirmed that it will, from 6 April 2020, increase the threshold income from £110,000 to £200,000, the adjusted income from £150,000 to £240,000 and will decrease the minimum reduced TAA from £10,000 to £4,000.
The threshold income, which is broadly net income before tax (excluding pension contributions), is increased from £110,000 to £200,000.
The adjusted income, which is broadly net income plus pension accrual, is increased from £150,000 to £240,000.
The minimum TAA is decreased from £10,000 to £4,000. So, someone affected could have a TAA of between £4,000 and £40,000.
By way of example, someone with threshold income of £140,000 and adjusted income of £210,000 will currently have a TAA of £10,000. However, from 2020/21, assuming no change to their salary/pension benefits, their TAA for tax relievable pension savings will increase to £40,000.