Tax relief for pension contributions

The decision of the Chancellor, Rishi Sunak to increase the tapered annual allowance thresholds in the Budget earlier this month will have been welcomed by many high earners. From 6 April 2020, the tapered annual allowance will increase from £150,000 to £240,000. The annual allowance for tax relief on pensions will remain at £40,000 for 2020-21.

This means that anyone with income below £240,000 will no longer be affected by the tapered annual allowance rules. From April, those earning over £240,000 will begin to see their £40,000 annual allowance tapered. For every complete £2 income exceeds £240,000 the annual allowance is reduced by £1.

The minimum level to which the annual allowance can taper down will also be reduced from £10,000 to £4,000. This reduction in the annual allowance will only kick-in for individuals whose income is over £300,000 and who will lose up to a further £6,000 of annual allowance in 2020-21. This will affect only those with the very highest earnings. A taxpayer earning £312,000 or more will only be able to contribute a maximum of £4,000 into a pension with the benefit of tax relief in 2020-21.

There is also a three year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years. The calculation of the exact amount of unused annual allowance that can be carried forward can be complicated especially if you are subject to the tapered annual allowance.