Budget 2020 – Pensions tax relief threshold hiked by £90,000 – and it’s not just NHS workers who will benefit

PENSION savers have been given a boost to how much they can squirrel away each year and still earn tax relief on under plans announced in today’s Budget.

Rishi Sunak, who delivered his first Budget after only securing the top job at the Treasury back in February following former chancellor Sajid Javid’s resignation, revealed a number of changes for pension savers.

Check out our Budget round-up for everything you need to know.

There were also some key changes Mr Sunak was expected to divulge but didn’t.

Here’s what you need to know:

The amount you can save into your pension and earn tax relief on is rising

For those earning under £150,000, the maximum amount you can save into your pension and earn tax relief on is currently capped at £40,000 a year, something that’s not changing.

But what the Budget has done is increase the so-called taper allowance linked to this.

The taper allowance sees the annual amount you can earn tax relief on reduced by £1 for every £2 higher earners are over the limit, up to a maximum reduction of £30,000.

Currently, the earnings threshold at which this happens is £150,000 or above, including taxable income and pension contributions, or £110,000 excluding pensions and other income.

So say you earn £160,000, your annual tax relief allowance would drop by £5,000 to £35,000, according to financial provider AJ Bell.

But the government says it will raise the threshold when this kicks in by £90,000 – so it will increase to £200,000 or £240,000 for everyone.

For those on the very highest incomes, the minimum level to which the annual allowance can taper down will, however, fall from £10,000 to £4,000 from April 2020.

This has been done in particular due to the strain it’s placing on the NHS where lots of senior staff have been taking early retirement or turning down overtime to protect their tax-relief allowance as it’s tricky for them to calculate.

Steve Webb, former pensions minister and partner at actuarial firm LCP, said: “Although raising the thresholds will substantially reduce the number of people affected by the tapered annual allowance, some higher earners are still at risk of being caught, especially if they get a promotion or take on additional responsibilities.

“What was needed was sweeping simplification but what we got was more Treasury tweaking.”

Charles McCready, strategic policy director at The Investing and Saving Alliance’s (TISA), said: “The increase of £90,000 to the pensions taper threshold will take 98 per cent of doctors out of scope of the tax.

“This will almost certainly help encourage more doctors to work longer hours, which is especially helpful at a time that COVID-19 is expecting to hit the NHS.”

Over your lifetime the amount you can save in a pension tax-free is currently £1,055,000, but it’s been announced in today’s Budget that this will rise.

From the 2020/21 financial year it will increase in line with the consumer prices index (CPI) measure of inflation to £1,073,100.

Tax relief might always be taken at source

For most people, tax relief is taken at source, which means it’s taken after tax and national insurance have been taken from your pay.

Tax relief is then added to your savings directly by HMRC for everyone at 20 per cent, increasing your pension contribution.

Higher and additional rate tax payers claim the extra they’re owed (see above) through their self-assessment.

But some are on a “net pay” scheme where they pay their pension contributions before tax has been deducted.

This isn’t a problem for most, as the relief is paid automatically for all taxpayers, explains Royal London.

But it says those earning under the income tax threshold of £12,500 don’t get the tax relief at all in this scenario and can’t claim it because they don’t pay tax to begin with.

The government has revealed in its budget that it’s launching a call for evidence on this.

Mr Webb added: “Around 1.7million lower paid workers earning less than the personal allowance currently miss out on the help with their pension that other lower paid workers receive, based solely on the way in which their pension scheme administers pension tax relief.

“This injustice, which affects many lower paid workers in particular must be addressed. Instead, all we have from the Treasury is the promise of a ‘call for evidence’.”

There was no cut to higher rate tax relief

In England and Wales (the rates differ in Scotland) basic rate taxpayers who pay 20 per cent income tax get a 20 per cent boost to their pension in the form of tax relief.

Higher rate tax payers who pay 40 per cent tax get a 40 per cent boost, and additional rate tax payers who pay 45 per cent get a 45 per cent boost.

So as a basic rate taxpayer, if you put £100 into your pension, that payment is effectively 80 per cent of what the total contribution is worth without tax.

This means you’d get an extra £25 tax relief on top to take you up to a 100 per cent contribution.

For higher rate tax payers, they’d get £66 tax relief, and it’s £81 for additional rate taxpayers.

It had been mooted that the relief for higher and additional rate earners could be reduced to 20 per cent, but there was no mention of this in the Budget.

State pension isn’t changing

Mr Sunak didn’t make any changes to the controversial – and expensive to run – state pension triple-lock, which increases the state pension by inflation, earnings, or 2.5 per cent, whichever is higher.

Plus, it’s already been confirmed that the state pension will rise by 3.9 per cent next month.

But he did say people can now obtain or inherit a state pension from an opposite-sex civil partner.