[UK]Thousands Breach the Annual Allowance

The Annual Allowance for pensions is currently £40,000 and is the annual limit to the amount of contributions that can be paid into a pension scheme and benefit from tax relief.  This is for defined contribution schemes, though there is a reduced Money Purchase Annual Allowance of £4,000 if a person has already started to flexibly access their pension.  For defined benefits schemes, the £40,000 it is the total amount of benefits that can be built up.  In both types of schemes and from 2016, the complicated Tapered Annual Allowance of £10,000 applies for earners with “adjusted income” over £150,000.  

(The above is a general overview of the allowances and readers should make sure that they get specialist tax advice, as allowances can be carried forward from one tax year to the next).

The consequences of the Annual Allowance (and the Money Purchase and Tapered Allowance) is that if contributions exceeded this amount, income tax is payable at the person’s marginal rate of tax.  In the tax year 2011/12, the Annual Allowance was reduced from £255,000 to £50,000 meaning that many thousands more people were brought into paying a tax charge.  In 2014/15, the Allowance was reduced again to £40,000 with the consequence that even more people were brought into paying income tax.  This is a big source of revenue for the government.

On the 26th of September 2019, the government release figures up to tax year 2017/18 which showed that over 37,000 people exceeded the Annual Allowance in that year.  This brought in £812 million to the UK Treasury.  The number of people brought into paying tax is over 10,000 more people than 2016/17 when £578 million was raised by the increased tax payable.


Global Payroll Association Comment

Higher earners should look for pension tax relief announcements in the coming months.

Whilst we do not comment on the overall policy, the figures clearly show the benefit to a future government of lowering this threshold.  The less money that can be saved per year as a result of a lower Annual Allowance, the more people will pay in the tax charge.  We believe that this is something to look out for in future policy announcements.  We also believe that individuals should get professional advice on how to use their Annual Allowance correctly, including carry forwards from one year to another.

Another thing to look out for is the consequences of raising the higher rate income tax threshold from £50,000 to £80,000, something that Prime Minister Boris Johnson pledged in the campaign to become leader of the Conservative Party (this threshold will not apply in Scotland).  If people are paying less tax at 40%, they will also only get 20% relief on pension contributions.  Whilst this does look attractive, getting less relief on pension contributions reduces the size of the pension pot for higher earners.   

Of course, we could do with a complete overhaul of the pension tax system anyway to make it fairer for all.  It does not seem “right” that a higher earner can get more tax relief than someone paying at a lower rate of tax on the same amount of contributions.

Pensions and tax relief is ripe for overhaul, not just for higher earners.