How does the tapered annual allowance work?

In July 2015, just after the pension freedoms began, anti avoidance rules were put in place to stop people abusing salary exchange or flexible remuneration arrangements. It was done to stop people receiving additional pension contributions and reducing their threshold or adjusted income at the same time, so how does the tapered annual allowance work?

The tapered annual allowance limits the amount of tax relief high earners can claim on their pension savings in 2021-2022 by reducing their annual allowance from £40,000 to £4,000 on a sliding scale.

the Tapered Annual Allowance applies for individuals with “threshold income” of over £200,000 AND “adjusted income” of over £240,000

Read on to find out if the tapered annual allowance applies to you, how threshold and adjusted income affect the tapered annual allowance calculations and what you can do to

Does the tapered annual allowance apply to me?

The tapered annual allowance applies to you if two conditions are met:

  1. You have a ‘threshold income’ over £200,000
  2. Your “adjusted income” is over £240,000.

To trigger the taper you must exceed both the threshold income and adjusted income, if you don’t exceed the threshold income you don’t need to worry about the adjusted income.

What is threshold income?

Threshold income excludes pension contributions but includes all types of income such as:

  • Salary, bonus,
  • Pension income (including state pension),
  • Trading profits,
  • Income from property (rental income),
  • Dividend income,
  • Interest from savings accounts held with banks, building societies, NS&I and Credit Unions,
  • interest distributions from authorised unit trusts and open-ended investment companies

If your threshold income is less than £200,000, the tapered annual allowance will not apply. If it is over £200,000, you will need to check your adjusted income to see if you will be affected. 

What is adjusted income?

Your adjusted income is your net income plus any personal and employer pension contributions. 

If your adjusted income exceeds £240,000, you will be subject to a tapered annual allowance. 

How to work out my tapered annual allowance?

When calculating the tapered annual allowance there is a £1 reduction in the annual allowance for every £2 of adjusted income over £240,000.

Annual Income Annual Contribution Allowance

Up to £240,000

£40,000

£250,000

£35,000

£260,000

£30,000

£270,000

£25,000

£280,000

£20,000

£290,000

£15,000

£300,000

£10,000

£310,000

£5,000

£312,000

£4,000

 

Is it possible to carry forward unused allowances?

Yes it’s possible to use carry forward where the tapered annual allowance applies in a tax year. Any unused annual allowance you have going back three tax years prior to the tax year in question can be carried forward as normal. 

Where the annual allowance has been reduced in a carry forward year as a result of the taper provisions, then the carry forward available will be based on the tapered annual allowance amount. 

For example, if 2018/19 is a carry forward year and £7,000 of contributions were made when a £10,000 tapered annual allowance applied, then there will be £3,000 of unused annual allowance to carry forward.

E.g. If you’re looking at 2018/19 and you made £7,000 of contributions when you had a £10,000 tapered allowance, then you can carry forward £3,000 of unused annual allowance.

What happens if I am already subject to the money purchase annual allowance (MPAA)?

If you are already subject to the money purchase annual allowance (MPAA), the tapered annual allowance will not affect you because your annual allowance will already be reduced to £4,000.

I have made pension savings over my available allowance what should I do?

You should include the extra amount on your self assessment tax return. These contributions are added to your taxable income from contributions you paid in the tax year. You will be subject to tax at the rate applicable to you. If you have pension savings made in that tax year which is more than your eligible annual salary and carryback pension you may enjoy.

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