The world as we know it has changed significantly over the past few months with many people experiencing damaging changes to their personal, financial and family situations. Sound financial planning to help people deal with this aspect of their lives, which can easily take a back seat and be forgotten, has never been more important.

Just prior to the lockdown of non-essential business and travel, there were announcements in Budget 2020 which opens up opportunities for tax efficient planning, and additional scope to provide a more comfortable retirement in the future, which is a priceless commodity today.  

The 2020 Budget, pensions and planning opportunities

The 2020 Budget announced changes to the reduction of pension contribution allowances for high earners. Previously individuals with remuneration over £150,000 suffered a reduction in their contribution allowance from the standard £40,000, potentially down to £10,000.

This ’tapering’ had applied to individuals with threshold income of £110,000 or more, and adjusted income of £150,000 or more. Broadly the difference between the two are that personal pension contributions are deducted from threshold income and employer pension contributions are added to adjusted income. Every £2 of income above the £150,000 cap resulted in a £1 reduction in pension contribution AA. Excess funding would result in a tax charge of 45%.

From the 2020/2021 tax year the Government has increased these allowances to £200,000 for threshold income and £240,000 for adjusted income.

The impact

Many individuals have opted out of joining company pension schemes, reduced or even stopped their pension funding altogether on the assumption that the annual allowance tax charge would make the pension funding inefficient.

There is now the opportunity to increase contributions to benefit from the tax advantages that pensions offer.

However, for those with particularly high incomes, the maximum tapering has increased from £10,000 to £4,000 resulting in a reduction in the scope to contribute.

The table below shows the impact on individuals with differing levels of income.

In Jane’s case there is the potential to fund an additional £30,000 gross as a pension contribution. The cost to Jane for this is £16,500 as demonstrated below:

Jane’s net pension contribution                              £24,000

Basic rate tax relief to the pension                          £6,000

Higher rate relief (via reduction in tax liability)       (£7,500)

In Barbara’s case there is a need to reduce her pension funding, and more focus on looking at alternative tax relievable investments, such as ISAs.

If you are thinking of setting up a pension or making a pension contribution and wish to explore these options further, then please speak to your adviser at Hazlewoods. If you are not already a Hazlewoods client, then please get in touch and ask to speak to someone in Financial Planning.

Hazlewoods Financial Planning LLP is authorised and regulated by the Financial Conduct Authority (FCA). This factsheet is intended for information purposes only and should not be taken as advice. If you have any doubts about your own situation then you should seek financial advice.