Complex pension annual allowance changes could catch out higher-earners

Higher earners could be caught out following changes to the pension annual allowance.

Under rules introduced in 2017, individuals earning more than £150,000 are restricted as to how much they can save into their pensions but, because the system is becoming increasingly confusing, many of them are likely to have paid too much in.

Most people in the UK are allowed to pay up to £40,000 into a pension each year. Savers benefit from a generous amount of tax relief, ranging from 20 per cent to 45 per cent depending on their income, and this is the main benefit of saving into a pension.

However, since April 2016, this annual allowance has fallen for the UK’s highest earners, with the allowance reducing by one pound for every two pounds of income above £150,000, with a maximum reduction of £30,000. This means that anyone earning more than £210,000 can only pay £10,000 into a pension each year.

There are fears that a number of these higher earners will not have understood the changes, which have been described as “absurdly complex”. However, if they have inadvertently paid the ‘usual’ £40,000, they could now be facing a tax bill of £13,500 – 45 per cent tax on the excess contribution of £30,000.

According to the most recent available Government data, 350,000 people in the UK had a total income of more than £150,000 in the 2014/15 tax year. However, this number is likely to have risen considerably since then.

For more information about MD Consulting’s personal tax services, please contact us.

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