Some good news, but no sweeping reforms

From a pensions perspective there was some good news in the Budget, although the more sweeping pension reforms that many have been lobbying for were hardly mentioned.

The main headlines, including some changes announced prior to the UK Budget that also take effect in the new tax year, are:

• Pensions tax relief remains unchanged.

• The tapered annual allowance thresholds will increase by £90,000.

• Those with adjusted income over £300,000 will see their tapered annual allowance reduced below the current £10,000 minimum and to just £4,000 once their income exceeds £312,000.

• In Scotland, income tax rates and allowances remain unchanged, but the basic and intermediate thresholds will increase in line with inflation (as announced in the Scottish budget on 6 February 2020).

• In the rest of the UK, income tax rates, bands and allowances remain unchanged.

• The auto-enrolment earnings trigger will remain at £10,000 and the lower limit of ‘qualifying earnings’ will increase to £6,240 a year (confirmed by the DWP ahead of the Budget).

Annual allowances

Tapered Annual Allowance

The ‘adjusted income’ and ‘threshold income’ levels have been increased by £90,000 to £240,000 and £200,000 respectively from 6 April 2020, which will significantly reduce the number of high earners affected by the tapered annual allowance.

For those still caught, the reduction in annual allowance is unchanged at £1 for every £2 of adjusted income over the new £240,000 adjusted income threshold. However, the minimum level the annual allowance can be tapered down to is reducing from £10,000 to £4,000 meaning those with adjusted income above £300,000 will see their annual allowance drop below the current £10,000 minimum and those with income above £312,000 will have an annual allowance of just £4,000.

Standard and Money Purchase Annual Allowances

There are no changes to the standard annual allowance which remains at £40,000 for the 2020/21 tax year.

The money purchase annual allowance, which impacts anyone who has accessed their pension flexibly, is also unchanged at £4,000 without any carry forward option.

Lifetime allowance

The lifetime allowance will increase in line with CPI to £1,073,100 for the 2020/21 tax year.

After applying the CPI increase (1.7% in the 12 months to September 2019) to the existing lifetime allowance and rounding to the next multiple of £100, which is normal practice, it was expected that the new level would be £1,073,000. However, HM Treasury’s Budget papers confirm the figure will be £100 higher than this.

Pensions annual allowances at a glance 

*reduced by £1 for every £2 of adjusted income above £240,000 (£150,000 in 2019/20) to a minimum of £4,000 (£10,000 in 2019/20)

Income tax

Rest of the UK 

There are no changes to income tax rates, bands or allowances, with the personal allowance and higher rate threshold remaining at £12,500 and £50,000 respectively.

Scotland

As announced in the Scottish budget on 6 February, the basic and intermediate thresholds will increase in line with inflation to £14,585 and £25,158 respectively for the 2020/21 tax year. There are no other changes to income tax rates, thresholds or allowances for Scottish taxpayers.

Income tax rates and bands

Rest of UK

Scotland

*The Personal Allowance is reduced by £1 for every £2 of income above £100,000. It can go down to zero.

National insurance contributions

The primary threshold for national insurance (NI) contributions will be increased meaning employees and the self-employed will not have to start paying NI contributions until their earnings reach £9,500. This change was expected and is in line with the Government’s aim to eventually increase these thresholds to £12,500, the point at which individuals normally start to pay income tax.

There are no changes to the upper earnings limit of £50,000 (the level at which the employee’s rate drops to 2%) or to the employer’s contribution rates.

For Scottish rate tax payers earning between £43,431 and £50,000, this creates a ‘sweet spot’ where they can effectively double their money if they participate in salary sacrifice. On a salary sacrifice basis they are entitled to 12% employee NI savings and 41% higher rate tax relief which means a £47 reduction in their take home pay can be converted into a £100 pension contribution. This could be even more if their employer passes on its 13.8% NI saving as an additional employer contribution.

National insurance rates and thresholds

*special rules apply for employees under 21 years old and apprentices under 25 years old

Auto-enrolment

Earnings Trigger

The earnings trigger for auto-enrolment remains unchanged at £10,000 annually. However, please remember that the trigger is based on pay reference periods, so in practice depends on your payroll frequency as detailed in the table below.

Qualifying Earnings

Qualifying earnings, also known as qualifying band earnings, are being increased. The lower threshold is being increased from £6,136 to £6,240, whilst the higher threshold remains at £50,000.

Schemes that operate under the ‘net pay arrangement’, typically trust-based schemes including master trusts, effectively apply their pensions tax relief by deducting pension contributions from pay before tax is calculated. This means members who earn at or below their personal allowance don’t get any pensions tax relief, whereas members of contract based schemes (e.g. stakeholder and group personal pension schemes) benefit from basic rate tax relief on their employee contributions, regardless of whether or not the member pays income tax.

With a view to addressing this discrepancy, the Government will shortly publish a call for evidence on pensions tax relief administration, and is committed to reviewing the options for addressing the different ways pension schemes administer tax relief.

IR35 changes to go ahead

Although not a pensions related issue, employers may be interested to learn that changes to off payroll working, often referred to as IR35, will be included in the Finance Bill 2020. This will see large and medium sized private companies becoming responsible for making the decision as to whether contractors working for them should be included on their payroll and deduct PAYE and NIC from 6 April 2020.

We hope you'll find this summary of use.

If you have any queries on any of the points above, please get in touch with your usual Punter Southall Aspire contact.