Pension contributions annual allowance – a trap for the unwary

As thoughts turn to pre-year end tax planning in the New Year one common approach taken by many to manage their annual income tax liabilities is the payment of personal or employer pension contributions.

For a number of years we have been used to the annual pension allowance being tapered for those with higher incomes – broadly, the £40k annual pension allowance tapered by £1 for every £2 of income over £150k, to a minimum figure of £10k for those with incomes over £210k.

For the 2020/21 tax year however, the threshold for adjusted income above which the taper begins to bite was increased to £240k, a good news story for those with incomes in the range of £150k to £240k. The sting in the tail however for those with adjusted incomes over the threshold is that the taper now extends further – so that the minimum level of annual allowance is now £4k per annum for those with incomes over £312k.

The rules are more complex than we have set out here but the key point is that for those with incomes over £300,000 great care will need to be taken to ensure that unforeseen tax liabilities do not arise. For those in this position who may already have contributed the full £10k this year there may still be time to rectify the situation but action will need to be taken before the tax year end.

Clearly this will only affect a small minority of taxpayers but the consequences for those it does affect can be significant and all the more painful if it is entirely unexpected. If you believe you may be affected by this change in the rules than please get in touch with your normal WR Partners contact to discuss matters as soon as possible.