MPAA freeze set to squeeze many more basic rate taxpayers


A freeze in the Money Purchase Annual Allowance (MPAA) along with changing tax thresholds is set to increase the number of basic rate taxpayers aged 55+ who have taken a taxable payment from a defined contribution pension facing a squeeze on tax relief on their future pension contributions, finds retirement specialist Just Group.

The freeze in the MPAA at £4,000 combined with new tax thresholds for 2020-21 shows how more employees, even those contributing the minimum 8% of salary to a workplace pension, could start to feel the squeeze due to pension contributions that exceed the allowance.

In 2020-21, the marginal rate of income tax was 20% on earnings up to £50,000 and someone earning that amount making an 8% pension input would be within the £4,000 MPAA limit.

For 2021-22, the 20% tax threshold is £50,270 and someone earning that amount making the 8% contribution would have an input of £4,021, just above the £4,000 limit. The scheme member would face an annual allowance charge on the £21 excess, in effect clawing back tax relief and reducing the tax efficiency of saving into the pension.

Stephen Lowe, group communications director at Just Group, commented: “It is not reasonable for policymakers to expect most people to be aware of and understand the complexities and consequences of the rules which impact their ability to keep saving into a pension.

“Nearly four in five pensions accessed by those aged 55+ each year without advice are missing out on the free, independent and impartial guidance they are entitled to from Pension Wise that could help them navigate these complex rules.”

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