Positive change is afoot with Pension Rules
Although the current climate makes it difficult to think about your long-term financial plans, the government’s changes to the pension rules may provide you with welcome relief when completing your 2020/21 Tax Return.
What has changed? Since the 2016/17 tax year and the introduction of the pension tapering rules, if your ‘Adjusted Income’ (Net Income, plus employer pension contributions) exceeded £150,000, and your ‘Threshold Income’ (Net Income, less private pension contributions) exceeded £110,000, your standard Pension Annual Allowance of £40,000 was tapered down to the restricted minimum of £10,000 (tapered by £1 for every £2 that the adjusted income exceeds £150,000). If your pension contributions exceeded the adjusted annual allowance (and you had no brought forward surplus entitlement to offset) you will have been subjected to an annual allowance charge, taxable at your marginal rate of tax – most unwelcome.
The good news is that the ‘Adjusted Income’ threshold has now been raised from £150,000 to £240,000, and the ‘Threshold Income’ threshold from £110,000 to £200,000. This will allow significantly more people earning around the £150,000 mark to contribute more towards their retirement nest egg without the fear of HMRC kindly stinging them at the end of the year with a bumper tax charge.
Although there is still a maximum lifetime limit, the freedom to contribute to your pension has greatly been expanded. Pension contributions are favoured by many due to being able to both provide you security in retirement, whilst also potentially helping to reduce your income tax liability on an annual basis.
So, assuming one day soon we may again be able to leave our homes and our thoughts can turn from the here and now, remember it could be beneficial to find a few extra pounds for your pension pot.
If you have any questions about how this may affect you, contact our tax team on 01243 782 423 or head to our contact page.