Policy paper

Pensions Tax Changes to income thresholds for calculating the tapered annual allowance from 6 April 2020

Published 11 March 2020

Who is likely to be affected

Following an increase in the threshold income and adjusted income, those individuals with a threshold income of between £110,000 and £200,000 and adjusted income between £150,000 and £240,000 will no longer be impacted by the tapered annual allowance.

For individuals who continue to be affected by the tapered annual allowance, the minimum tapered annual allowance will be £4,000 (currently £10,000).

Scheme administrators of registered pension schemes will need to modify their systems to accommodate for these changes.

General description of the measure

This measure increases the income limits used in calculating a tapered annual allowance and decreases the minimum tapered annual allowance.

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 tapered annual allowance is decreased from £10,000 to £4,000.

Policy objective

The measure supports the government’s objective to make sure pensions tax relief is fair, affordable and sustainable.

Background to the measure

The government introduced the tapered annual allowance with effect from 6 April 2016 for those with incomes of over £150,000. The tapered annual allowance is triggered when both the threshold income and the adjusted income 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.

In August 2019 the previous government announced a review of the tapered annual allowance and its effect on the delivery of public services. In December 2019 the government further announced a more focused review of the taper and its effect on the NHS.

Following this, the government has announced that it will 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 tapered annual allowance from £10,000 to £4,000.

Detailed proposal

Operative date

The measure will have effect for the tax year 2020 to 2021 and will be effective for benefits accrued on or after 6 April 2020.

Current law

Although there are no limits to how much an individual can save or accrue in a registered pension scheme, there is an annual limit on the amount of an individual’s tax-relieved annual pension savings or accrual (including employer contributions). This is known as the annual allowance (sections 227 to 238A of Finance Act 2004).

The standard annual allowance is currently £40,000. Unused annual allowance from the three previous tax years for the individual can be carried forward and added to the current annual allowance. If the individuals’ pension savings for the tax year exceed this total, the annual allowance charge is applied to the excess.

The rules for the tapered annual allowance came into force on 6 April 2016 and are set out in Section 228ZA Finance Act 2004. These rules apply to individuals with ‘adjusted income’ for a tax year above £150,000 subject to their threshold income exceeding £110,000. Both income limits have to be exceeded before a person is affected by the tapered annual allowance.

The annual allowance is reduced by £1 for every £2 of adjusted income above £150,000, subject to a minimum reduced annual allowance of £10,000.

Where the reduction would otherwise take an individual’s tapered annual allowance below £10,000 for the tax year, their reduced annual allowance for that year is restricted to £10,000.

Proposed revisions

Legislation will be introduced in Finance Bill 2020 to amend the threshold income to £200,000 and the adjusted income to £240,000, whilst also reducing the minimum tapered annual allowance from £10,000 to £4,000.

Summary of impacts

Exchequer impact (£m)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
–	-180	-315	-450	-560	-670

This measure is not expected to have an Exchequer impact.

These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.

Economic impact

This measure is not expected to have any significant macroeconomic impacts. A behavioural adjustment is made for some affected individuals choosing to make higher pension contributions.

Impact on individuals, households and families

This measure will impact an estimated 250,000 individuals who are currently affected by the tapered annual allowance. This figure consists of individuals who no longer fit the criteria as they now fall below either one or both of the thresholds, those who are still impacted by the taper but are entitled to make more tax relievable pension contributions, and individuals who will be impacted by the reduced minimum tapered annual allowance.

Individuals who continue to be affected by the taper, depending on their adjusted income, may be impacted by the reduced minimum tapered annual allowance decreasing to £4,000. Individuals who no longer exceed the annual allowance as a result of the taper may choose to work more hours. However for those with very high incomes, being affected by the reduced minimum annual allowance may make them consider retiring earlier or reducing hours. Especially if they cannot easily reduce contributions.

The change in tax liability brought by this measure is unlikely to have an impact on family formation, stability or breakdown. 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 tapered annual allowance has increased. Some individuals may be affected more than others depending on their income levels and family circumstances.

Customer experience with HMRC is expected to improve for those who are no longer are affected by the taper as they will no longer have to do the additional calculations. Those who continue to be affected would expect their experience to remain broadly the same as the process will not change for them.

Equalities impacts

Our analysis from the Family Resources Survey show that 2% of the overall male population and 1% of the overall female population are earning more than £150,000. This measure will therefore impact men more than women. It is not anticipated that there will be any particular impact on other groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses administering registered pension schemes.

One-off costs for businesses will include familiarisation with the changes and could also include updating systems to reflect changes to the annual allowance. Additional one-off costs could also include training staff of changes, legal and consultation advice and undertaking extra end of year calculations.

There are not expected to be any additional ongoing costs.

Customer experience is expected to stay broadly the same as the process is not expected to change significantly.

This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

Minimal changes will need to be made to the online guidance on gov.uk and The Pensions Annual Allowance Calculator. The calculator will need amending to take into consideration the increased limits and reduction in minimum annual allowance. This will only impact the Digital Operations Delivery Group and the estimated cost of this will be £5,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, contact Sinthuja Path Telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.