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11 Mar 2020

Budget 2020: state pension to increase by 3.9% from April 2020

Chancellor leaves pension tax relief untouched, but adjusts the taper

New Chancellor of the Exchequer, Rishi Sunak confirmed in today's Budget that the state pension will rise by 3.9% in the 2020-21 tax year.

He also unveiled a big increase in the thresholds for the tapered annual allowance, but left the core pension tax relief system unchanged.

The lifetime allowance - the total amount you can put into a pension - for pension savings will increase in line with CPI for 2020-21, rising to £1,073,000.

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State pension to get a 3.9% boost

The state pension will increase by 3.9% from 6 April 2020.

The rise is thanks to the triple-lock system, which states that the state pension must rise by September's price inflation, average earnings growth or 2.5% - whichever is higher.

In this case, the state pension will be matching the 3.9% average earnings increase seen by UK workers in July last year.

Both the pre-April 2016 basic state pension and the new state pension are protected by the triple lock guarantee.

New state pensioners £343 better off

Those who are entitled to the full new single-tier state pension will see their payments increase by £6.60 per week, taking the weekly amount from to £168.60 to £175.20.

New state pensioners will be £343.20 better off by the end of the 2020-21 tax year, with annual income increasing from £8,767.20 to £9,110.40 to a year.

The basic state pension will rise by £5.05 per week (£129.20 to £134.25 per week). This will translate into an annual boost of £262.60 a year with total annual income rising from £6,718.40 to £6,981.

Our graph shows the amount of state pension you receive per week.

Weekly state pension payments

New lifetime allowance is £1.073 million

The pension lifetime allowance has been set at £1,073,000 for 2020-21.

You can save as much as you want to in your pension during your working life - but if it exceeds a total amount (the lifetime allowance), you could be hit with a hefty tax charge.

Our graph below illustrates how the pension lifetime allowance has changed over recent years.

Pension lifetime allowance

Rise in the tapered annual allowance

Mr Sunak also unveiled plans to increase the tapered annual allowance thresholds by £90,000. This will apply to all high earners, but will particularly help to ease the pressure on some NHS workers (eg doctors and surgeons) who've received large tax bills as a result of their earnings.

The tapered annual allowance was introduced from 6 April 2016 to limit the amount of pension tax relief available to higher earners.

The taper currently sees the annual allowance reduce from £40,000 to £10,000 for those with 'threshold' incomes of £110,000 and 'adjusted' annual incomes of £150,000 to £210,000.

Broadly, those earning more than £110,000 are assessed to see whether they're subject to the annual allowance taper. Adjusted income is your total taxable income - so salary, dividends, rental income, savings interest, plus employer pension contributions.

From April 2020, both the threshold and adjusted incomes will rise by £90,000 to £200,000 and £240,000, respectively. For those with total income of more than £300,000, the annual allowance will gradually fall from £10,000 to £4,000, so it will be £4,000 only for anybody earning in excess of £312,000.

The Chancellor resisted more fundamental changes to the pension tax relief system.

The Which? guide explains how pension tax relief works.

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