The Budget contained a welcome pension tax boost for many high earners as rules for the Tapered Annual Allowance were loosened.

The effect of the change is that, from April 6, anyone with earnings below £200,000 will not now be affected by the Taper, which reduces the amount of tax-relieved pension contributions a person can make each year. Before the change, anyone with earnings above £110,000 could potentially have been impacted (there’s a full explanation of how it works below).

The Government had already been considering taking action on the Tapered Annual Allowance because it was having an unintended impact on doctors in the NHS. Some doctors were finding that the extra hours they were putting in, and the extra pension entitlements this created, meant they were breaking the limits of tax-relieved pension savings - often without them knowing about it. This created unexpected tax bills and some doctors even retired early to avoid that happening.

The Coronavirus health emergency has only made action more urgent.

The Tapered Annual Allowance explained

It makes sense to first explain the Annual Allowance. This is a cap on how much you can pay into a pension each financial year while still getting tax relief on those contributions. Right now the Annual Allowance is set at £40,000.

In 2017 the Tapered Annual Allowance was introduced. It was designed to save money by making the system a bit less generous to high earners. In the simplest terms, it gradually reduced - or tapers - the Annual Allowance from £40,000 to £10,000 once a person hit some specified earning limits.

Who is caught be the Tapered Annual Allowance at the moment?

Before the Budget changes announced today come into force, anyone whose annual income was more than £110,000 could have been affected - but not everyone was. It depended on two measures of income - ‘Threshold Income’ and ‘Adjusted Income’. The limits for both of these had to be triggered before a person was affected by the Tapered Annual Allowance.

In broad terms, Threshold Income includes your income from all sources minus pension contributions you’ve made. Adjusted Income is a higher amount and includes all your taxable income plus any pension contributions made to a workplace pension by you and your employer.

Anyone whose Threshold Income was more than £110,000 and whose Adjusted Income was more than £150,000 was subject to the Tapered Annual Allowance. There’s a more detailed explanation of how these are worked out in our Tapered Annual Allowance guide.

What is the effect of the Tapered Annual Allowance?

For those affected, the £40,000 Annual Allowance was reduced by £1 for every £2 that their Adjusted Income exceeded £150,000. Reductions continued until Adjusted Earnings reached £210,000. At that point their Annual Allowance was limited to just £10,000.

What’s changing in the Budget?

From April 6, the two earnings thresholds will both rise by £90,000 - taking the Threshold Income limit to £200,000 and the Adjusted Income limit to £240,000. If both earnings thresholds are met, a person’s Annual Allowance will now be tapered down gradually so that, by the time Adjusted Income hits £300,000, a lower £4,000 Annual Allowance will apply.

If you think you may be affected by the Tapered Annual Allowance consider getting help from an authorised financial adviser.

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Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. You cannot normally access money in a pension until age 55. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.