In his March budget, the Chancellor raised the earnings level at which the tapered Annual Allowance (AA) takes effect, from £150,000 to £240,000, as of 6 April 2020.

The standard AA is currently set at £40,000. However, for high earners, a tapered AA was introduced from 6 April 2016, which reduced their AA by £1 for every £2 of income over their ‘Adjusted Income’, which at the time was £150,000. The maximum reduction was £30,000, so anyone with income of £210,000 or more had an Annual Allowance of £10,000. The Adjusted Income figure has now been increased from £150,000 to £240,000.

If you were affected by the tapered Annual Allowance in previous years (that is, your Annual Allowance was reduced to less than £40,000), but now, following the changes, your ‘Adjusted Income’ in 2020/21 is not high enough for you to be affected, please be aware that you may still be restricted as to how much you can put into your pension this tax year.

For example, if you are planning to use any unused Annual Allowance from previous tax years to pay in more than £40,000 in the current tax year, the amount you can carry forward will still be affected by your tapered Annual Allowance in previous years, i.e., the change is not retrospective.

Example

Let’s assume that over the last three years, you have earned £200,000 a year. Your tapered Annual Allowance over the last three years has been:
£40,000 - (£200,000-£150,000)/2 = £15,000

Let’s say you paid £10,000 into your pension in the last three years. That means your unused allowance for the last three years is £15,000:
Annual Allowance 2018/19 £5,000 +
Annual Allowance 2017/18 £5,000 +
Annual Allowance 2016/17 £5,000

You decide you want to pay £60,000 into your pension this tax year (2020/21), to make up for the years you were restricted by the tapered AA. In this case, you would not have enough unused allowance from the previous tax years to be able to do this, because you only have £15,000 to carry forward to this year.

Please also note that your pension benefit statement will show a standard Annual Allowance of £40,000, but this doesn’t take into consideration the impact of the tapered Annual Allowance. This is because the Plan administrators don’t know how much your taxable earnings are outside of your Caterpillar employment (for example, you may have rental income or other sources of income which count towards the Adjusted Income figure on which the tapered Annual Allowance is based).

If you do not have an independent financial adviser with whom you can discuss your pension contributions and potential Annual Allowance tax charges, you can find one on this website: www.unbiased.co.uk