12/01/2022
Pension contribution complications – annual allowances and the pension savings tax charge
There have been a number of changes in recent years regarding relief for pension contributions. In 2006 the annual allowance was first introduced, with a substantial initial limit of £215,000. This rose over the following few years, up to £255,000 in 2009/10, before being significantly cut to just £50,000 in 2010/11. The limit was reduced again in 2014 to £40,000 – the annual allowance that is still in place today.
However, the Government sought to add substantial complexity to pension relief by introducing the taper provisions in 2016, which originally enabled the annual allowance to be reduced to a minimum of £10,000 if the income threshold tests were met. Whilst the income limits have increased from 2020/21 onwards, the minimum allowance has also been further reduced to just £4,000.
There is not just one income test either, there are two: threshold income and adjusted income. From 2020/21 onwards threshold income is £200,000, adjusting income £240,000. If adjusted income exceeds £312,000 the £4,000 annual allowance will be applicable.
In case this wasn’t complex enough, there are also carry forward rules to consider, where annual allowances in previous years were not fully utilised.
If contributions are made, by employers or employees, in excess of the available annual allowance (current year and carry forward, if relevant), a pension savings tax charge becomes due. This is included in the self assessment tax return and payable on the usual due date of 31 January following the end of the tax year.
For healthcare professionals within the NHS pension scheme only, who breached the annual allowance in 2019/20 and consequently suffered the pension savings tax charge, this charge can be reimbursed at the point of retirement. BUT, only if an election is made by 31st March 2022.
Pensions are an extremely complex area. If you have any questions on these please do contact Gemma Hedges on 023 8046 1259 or gemma.hedges@hwb-accountants.com.
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