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Pension Annual Allowance Update

New threshold rates for calculating the pension annual allowance

Posted 29/10/2020

From April 2021 the threshold and adjusted income for your pension annual allowance will be increased from £110k to £200k and from £150k to £240k respectively. If your threshold and adjusted incomes both exceed their respective thresholds your annual allowance will be reduced; the minimum it can be reduced to will be lowered from £10k to £4k. This means that someone with an adjusted income of £312k will have an annual allowance of £4k.

If your pension contributions for the year exceed your annual allowance (after carry forward of any unutilised annual allowance from the previous 3 tax years) you will be faced with a tax charge on the excess.

“Scheme Pays” scheme

If you have a tax charge you can either pay it via Self Assessment or elect for the pension scheme to pay the charge for you under the “scheme pays” scheme. The deadline for submitting this election is 31 July following the January in which the annual allowance charge must be declared eg 31 July 2021 for an annual allowance charge relating to the 2019/20 tax year. As the scheme pays the charge, making this election will result in a reduction to your pension at retirement.

NHS Workers

For the 2019/20 tax year, the chancellor and Welsh Government made a commitment to pay the annual allowance tax charges in full for NHS workers in the England and Wales NHS pension schemes. The affected workers should utilise the scheme pays scheme to pay the tax due for the 2019/20 tax year. The scheme will generate a loan which is deducted from your pension pot at retirement. Under the arrangement, NHS England/Welsh Government will make an additional payment alongside your pension to offset any reduction arising as a result of the annual allowance charge in 2019/20.

Bottom line

The new higher threshold rates coming in from April 2021 will allow all workers a higher income before their annual allowance is reduced.

By electing under the scheme pays method, workers subject to the annual allowance charge can elect for the charge to be taken from their pension pot instead of paying out of pocket via Self Assessment.

If you are an NHS worker liable to the annual allowance charge for the 2019/20 tax year you could save a significant amount of tax by taking advantage of the government measure. It is important that you don’t pay the charge via Self Assessment but instead make an election under scheme pays by 31 July 2021 to get the annual charge paid for you by the government.

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